The demand for foreign currencies in Nigeria: an empirical analysis

Abstract

The effective management of the foreign reserves and the exchange market in Nigeria continue to pose challenges to the Central Bank of Nigeria. From inception to date and particularly after the structural adjustment programme of 1986, different foreign exchange policies had been formulated not only to reduce the demand for foreign currencies, but also to enhance the supply and conserve the level of international reserves. These policies achieved varying degrees of success. Against this background, this paper utilized the error correction framework in identifying relevant factors that impact on the demand for foreign currencies in Nigeria. The essence of our results was that the demand for foreign currency in Nigeria was a stable function the long run or past levels demand, the level of liquidity, lagged values of the real exchange rates and the premium between the autonomous and parallel exchange rates, the level of international transactions measured through the current account balance, the domestic inflation rate and the real treasury bill rates in Nigeria.