Determinants and Sustainability of International Reserves Accumulation in Nigeria

This paper examines the determinants and sustainability of international reserves accumulation in Nigeria. An assessment of the short- and long-run relationship between international reserves and its driving factors between 1970 and 2010 is carried out with a view of determining its sustainability, given the need to save against future exigencies. It makes use of error correction mechanism and the bounds testing approach to co integration within an autoregressive distributed lag framework proposed by Pesaran et al. (2001). The empirical estimates reveal that variability of export earnings, and the one period lagged value of international reserves positively affect reserve holding in Nigeria while oil price negatively affect it in the long-run. The economic (GDP per capita) and environmental (CO2 emission) measures of sustainable development also affect international reserves accumulation in the long-run. The striking result from this study is that oil price negatively affects reserve holding in the long-run but is positive in the short-run. The findings suggest the need to diversify Nigeria’s sources of external reserves accumulation towards more environmentally and economically sustainable activities such that the negative effects of volatile oil export earnings as well as crude oil extraction are minimized. JEL Classification: F31, Q56