EXTERNAL RESERVES AND EXCHANGE RATE BEHAVIOUR IN NIGERIA: AN EMPIRICAL INVESTIGATION 1981-2009
ABSTRACT
    This study examines the effect of exchange rate on external reserve using Nigerian macroeconomic data. We employed the Ordinary Least Square (OLS) regression technique.
    We discovered from our research that inflation is negatively related to external reserve behavior in Nigeria, but its impact is statistically insignificant. The findings from this empirical study reveal that external reserve significantly affects exchange rate behavior in Nigeria.  
 
TABLE OF CONTENT
CHAPTER ONE: INTRODUCTION
1.1    Background of the Study                   
1.2    Statement of the Problem                   
1.3    Objectives of the Study                       
1.4    Hypotheses of the Study                    
1.5    Scope of the Study                       
1.6    The Significance of the Study               
CHAPTER TWO: LITERATURE REVIEW
2.1    Conceptual Issues                       
2.2    Foreign Exchange Reserves                
2.3    History of Foreign Exchange Reserve            
2.4    Purpose of Foreign Exchange Reserve            
2.5    The Reserves/Import Ratio                    
2.6    The Demand for External Reserves, a
Review of Empirical Work                    
2.7    Changes in Foreign Exchange Reserves       
2.8    An Overview of the behavior of Exchange
 Rate in Nigeria                            
2.9    Reserves and Foreign Exchange Management in
Nigeria                                
2.10    Generation and Conservation of Foreign
Exchange Reserves                       
2.11    Ensuring Adequacy of International Reserves       
2.12    Preserving the Purchasing Power of Nigeria
International Reserves                        
2.13    Problems of Foreign Exchange in Nigeria        

CHAPTER THREE: METHODOLOGY
3.1    Introduction                            
3.2     Model Specification                       
3.3    Source of Data                           
CHAPTER FOUR: EMPIRICAL ANALYSIS
4.1    Introduction                            
4.2     Discussion of Results                        
CHAPTER FIVE: SUMMARY, RECOMMENDATIONS AND CONCLUSION
5.1    Summary of Findings                        
5.2    Conclusion                               
5.3    Recommendations                       
    Bibliography                            
    Appendix                                
 CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND OF THE STUDIES
Foreign exchange is the foreign currencies which is been held by a country, it is usually the most crucial component of a country’s total means of the international reserves or international liquidity. International   reserves are a country external assets including foreign currency deposits and bonds held by the central banks and monetary authorities, gold and special drawing rights (SDR) which are available to the monetary assets. Adamu (2000) sees external reserves as comprising the stock of liquid financially assets available to the monetary authorized and also to defined the value of the currency.
 Exchange rate is the rate at which a country’s currency can be exchanged for  another country’s .Exchange rate are impacted by international trade in a free market system, and helps to maintain a balance of trade and balance of capital.
The increase importance of exchange rate in macroeconomic management is as a result of the fact that variation in the rate of exchange has significant implication for a nation’s balance of payments position as well as it international payment system. Thus in Nigeria where most of the technologies and resources management of foreign exchange (external reserve to a large extent determine the speed and the level of attachment of such development goals as stated by Edo (2003). Hence as a policy frame work in the role of financial regulation by the then Central bank, strives to be prudent in the use of external reserves in order to provide liquidity and confidence trading partners needed to sustain the supply of foreign resources which the nation requires for a perfect economic growth and development.
In recent years concern has been expressed about the adequacy of Nigeria’s external reserve. Nigeria external reserves have not risen as fast as oil price since 2009 till date. External reserves have risen by average of 3.52% per year and 15.79% average yearly rise in the price of bonny light crude oil. Over the same period debt service payment rose by 96.34% yearly. It has been regarded as a result of inadequate growth of foreign exchange to finance imports, especially when it has been observed that during the past two decades Nigeria has been experiencing massive outflow of capital due to high debt services payment, adverse term of trade, unstable macro economics policy environment political instability and also the volatility in export receipts.
As a result, the external reserve position of resources (domestic or foreign to promote economic growth.     
In the monetary theory of international trade, money and the various national currencies are in traduced into the analysis. The most important being the exchange rate which is the ability of the economy to attain its optimal productive capacity and improve its internal reserve position.
1.2    STATEMENT OF THE PROBLEM
 Nigeria has been experiencing massive out flow of her capital due to         high debt service payment adverse terms of trade, financial deficit and volatility in export receipt, instability in the foreign rate of exchange and invaluable short of international reserve. As a result the external reserve position in Nigeria has determined, resulting in inadequacy of resources to promote economic growth.
Nigeria’s inadequacy of reserve is disastrously leading to aborted economic development and continued poverty; the impact of foreign exchange rate variability on external reserve becomes an issue to be ascertained especially when a lot of work has been done in the area of demand for external reserve for advanced countries. E.g Indian, Northern Affairs’ Canada.
Only a few studies addressed in the case of Nigeria given the fact that the international payment influenced the exchange rate and intervene in the financial market e.g the fiscal authority or the monetary authority. The problem therefore entails ascertainment of the disastrous effect of the inadequacy external reserve may have caused the country.
From the foregoing, this study seeks to ascertain (if any) the relationship between external reserve and exchange rate behaviour in Nigeria.
1.3         OBJECTIVES OF THE STUDY
The primary objective of this study is to examine empirically the relationship between external reserve and exchange rate behaviour in Nigeria.       
This therefore suggests other additional which includes;
i.    To examine whether or not the exchange rate had impacted significantly on the   country’s external reserve position.
ii.    To examine the adequacy of international reserves in Nigeria and the reserves import ratio as a measure of adequacy.                                                                                
iii.    To examine the country’s minimum required level of external reserve that could meet its import demand.
1.4        HYPOTHESES OF THE STUDY
The following hypotheses have been designed to enable us carry out our empirical verifications.
i.    That a significant relationship exists between the levels of the external reserve in Nigeria and prevailing exchange rate.
 A positive relationship exist between the reserve impact ratio; the level of optimum reserves.
1.5          SCOPE OF THE STUDY
    The study focuses on external reserves position in Nigeria and it relationship with the existing exchange rate. For empirical purpose a period of 29 years is covered (1981-2009).
1.6     THE SIGNIFICANT OF THE STUDY
    By revealing the impact of exchange rate on foreign reserves, the study provides policy measures that are germane to maintaining a reserve which would promote the national goal of rapid and sustainable economy growth.
The study will be of great help to the monetary authority on how to adequately manage external reserves.
 Another significance of the this study is the fact that its findings will be of immense importance to policy makers as in the area of financing balance of payment deficit, imbalance in international payment as well as using the reserve to influence the exchange rate.
This research is important to researchers and students because it will enable them to have a wide knowledge about the concept of external reserves.