External trade and its implications on foreign exchange reserves in Nigeria

Abstract

The fluctuations in Nigeria’s foreign exchange reserves and the increase in both import and export trade make it imperative to determine how trade has influenced the country’s foreign reserves. Utilizing data on foreign reserves, oil imports, non-oil imports, oil export, non-oil exports and exchange rate in Nigeria during the period 1980 – 2015 and analysing it using the cointegration and Vector Error Correction Model, the findings revealed that foreign trade has serious implications for Nigeria’s foreign reserves. This is evidenced from the causality test results which revealed that oil import, non-oil imports, oil exports, non-oil exports and exchange rate propelled foreign reserves. Also the Vector Error Correction result indicates that oil and non-oil export are positively and correctly signed hence has positive implication on foreign reserves while oil and non-oil imports were negatively signed implying that they retarded foreign reserves in Nigeria. Specifically, oil export, non-oil imports and exchange rate were significant at 5 percent. This implies that they impacted significantly on foreign exchange reserves in Nigeria during the period covered by the study. Based on these findings, we suggestthe need to diversify the country’s export base and eliminating frivolous imports as possible measures of improving foreign reserves in Nigeria.