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Channelling The Nigeria’s Foreign Exchange Reserves into Alternative Investment Outlets: A Critical Analysis

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Author Info

  • Asimiyu Gbolagade Abiola

    (Research Division, National Institute for Legislative Studies,National Assembly, 14/18 Danube Street, Maitama, Abuja-Nigeria)

  • Francis Ojo Adebayo

    (Research Division, National Institute for Legislative Studies, National Assembly, 14/18 Danube Street, Maitama, Abuja-Nigeria)

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    Abstract

    In recent years, impressive price of crude oil has stimulated the accumulation of foreign exchange reserves in Nigeria. However, observers have expressed fears about the channels of utilisation of the reserves, especially to other alternatives investment outlets. This paper examines the cost-effective propositions of the foreign reserves in Nigeria, and considers alternative investment channels. The study uses data from publications of the Central Bank of Nigeria (CBN), Statistical Bulletin, Annual Reports and Statement of Accounts. It adopts the theory of demand for internationalreserves based on three motive notably transaction, precautionary and mercantilist. The study among others finds that Nigeria foreign reserve is adequate. The level of reserves to import satisfies the international benchmark etc. The study recommends among others the need to split foreign reserves into four portfolios. The liquidity portfolio, long-term portfolio or investment portfolio, immunization portfolio, and the petroleum fund buffer portfolio or sovereign wealth fund.

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    Bibliographic Info

    Article provided by Econjournals in its journal International Journal of Economics and Financial Issues.

    Volume (Year): 3 (2013)
    Issue (Month): 4 ()
    Pages: 813 - 826

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    Handle: RePEc:eco:journ1:2013-04-4

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    Web page: http://www.econjournals.com

    Related research

    Keywords: Foreign exchange reserve; investment outlet; gross domestic product;

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    1. Barry Eichengreen, 2007. "Insurance Underwriter or Financial Development Fund: What Role for Reserve Pooling in Latin America?," Open Economies Review, Springer, vol. 18(1), pages 27-52, February.
    2. Daniel F. Waggoner & Tao Zha, 1998. "Conditional forecasts in dynamic multivariate models," Working Paper 98-22, Federal Reserve Bank of Atlanta.
    3. Joshua Aizenman & Jaewoo Lee, 2005. "International Reserves," IMF Working Papers 05/198, International Monetary Fund.
    4. Jacob A. Frenkel & Boyan Jovanovic, 1981. "On Transactions and Precautionary Demand For Money," NBER Working Papers 0288, National Bureau of Economic Research, Inc.
    5. Joshua Aizenman & Nancy P. Marion, 2002. "The high demand for international reserves in the Far East: what's going on?," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
    6. Dani Rodrik, 2006. "The social cost of foreign exchange reserves," International Economic Journal, Taylor & Francis Journals, vol. 20(3), pages 253-266.
    7. Léonce Ndikumana & Adam Elhiraika, 2007. "Reserves Accumulation in African Countries: Sources, Motivations, and Effects," UMASS Amherst Economics Working Papers 2007-12, University of Massachusetts Amherst, Department of Economics.
    8. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
    9. Ben-Bassat, Avraham & Gottlieb, Daniel, 1992. "Optimal international reserves and sovereign risk," Journal of International Economics, Elsevier, vol. 33(3-4), pages 345-362, November.
    10. Mohsin S. Khan, 1979. "Inflation and International Reserves: A Time-Series Analysis (Inflation et réserves internationales: analyse de séries chronologiques) (Inflación y reservas internacionales: Un análisis de," IMF Staff Papers, Palgrave Macmillan, vol. 26(4), pages 699-724, December.
    11. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    12. Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 1-90.
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