RESERVE DEMAND AND MANAGEMENT IN NIGERIA

Abstract

This study stems from the depletion of Nigeria’s Reserves in recent times and its implications on the desirability or otherwise of holding Reserves as embedded in her Reserve Management Strategy. A Reserve demand function was developed using a simultaneous equation model and it was found that the opportunity cost of holding Reserves negatively and significantly affects Reserve holdings. The IMF condition and Guidotti-Greenspan condition for Reserves Adequacy were significant determinants of Reserve holdings, other factors included previous values of Nominal Exchange Rate, Trade Openness and the Capital and Current Account Vulnerability. Conclusions drawn were that the decision to hold Reserves is motivated by the return on Reserves and an account of the Short Term Debt by Reserves. It was also found that there is no complementarity in the interdependency between Real GDP and Foreign Exchange Reserves. Recommendations rendered were that the Federal Government should review her Exchange Rate policy in order to reduce the bearing of exchange rate management on Reserves depletion, and that the excess on Reserves should be spent on improving the investment climate in order to balance the complementarity expected of the economy’s size and Reserves accumulation.