Modeling the Impact of External Reserves on Economic Growth in Nigeria: An Application of Autoregressive Distributed Lag

Abstract

The article investigates the effect of foreign exchange reserves on Nigerian economic growth from 1970 and 2022. The methodology used to confirm the presence of a correlation between Nigeria’s external reserves and economic growth was the Autoregressive Distributed Lag Model Bounds Test and Error Correction Model. It was revealed that an increase in the gross domestic product was positively and significantly correlated with external reserve. The findings suggest that, over the long term, Nigeria’s external reserve, currency rate, export, import, and money supply all have a significant and beneficial impact on the country’s gross domestic product growth. However, during the study period, import, money supply, and export had more positive effects on GDP growth than external reserve and exchange rate. At a 5% level, the coefficients are statistically significant. These findings have a key consequence that external reserves are crucial for economic growth in Nigeria since they have a positive and significant link with both short- and long-term GDP growth. Given that these macroeconomic indicator variables have a large impact on GDP development, the government and other relevant organizations should develop policies that would help Nigeria increase its external reserve and achieve a stable and favorable exchange rate. Government, however, ought to concentrate on maximizing reserve building. As a result, optimal reserve is recommended in relation to the shocks the economy will experience and the debt’s existing value. The accumulation of reserves makes it necessary to pay for the importation of goods and services, infrastructural needs, agricultural needs, servicing of the country’s external debt, and financing domestic fiscal expenditure. As a result, optimal reserves will balance both economic growth and external reserves.