MACROECONOMIC FUNDAMENTALS AND THE DYNAMICS OF EXTERNAL RESERVES IN NIGERIA

Abstract

This study aimed to investigate how macroeconomic variables affected Nigeria's external reserve between 1986 and 2021. The specific objectives included examining the impact of inflation rate, exchange rate, interest rate, money supply, and trade openness on the external reserve. The study used a regression model, specifically the auto regressive distributed lag model base line testing approach. The results showed that inflation rate and exchange rate had a negative and non-significant impact on external reserve, while interest rate had a positive and non-significant impact. On the other hand, broad money supply had a positive and non-significant impact, while trade openness had a positive and significant impact on the external reserve. These findings suggest that Nigeria's macroeconomic variables have had a negative impact on its external reserve. The study recommends that the government should encourage local production, financial development to regulate exchange rate fluctuations, and stabilize exchange rates to improve the external reserve's capacity. Additionally, efforts should be made to improve the economy through adequate regulation of interest rates and controlling their volatility, deepening the financial system by expanding the money supply. Finally, the study suggests that the government should focus on exportation and regulating importation to improve trade and boost the external reserve. Thus, import substitution and export promotion should be highly encouraged.