Determinants of currency composition of external reserves in Nigeria: an empirical investigation.

Abstract

This paper discusses the determinants of the currency composition of external reserves in Nigeria. The empirical analysis reveals that the main factors influencing the currency composition of external reserves in Nigeria are international trade transactions and currency compostion of external debt, while reserve adequacy aided the diversification into more currencies. Exchange and interest rates were relatively significant in the share of each currency in the reserve basket. A review of CBN's external reserves policy confirmed that vigorous diversification was embarked upon when there was remarkable increase in the level of the reserve. However, current CBN reserve management policy shows a gradual shift from diversification to liquidity as reflected in the denomination of a larger proportion of the external reserves in dollar which makes for easy settlement of external trade obligations and other foreign commitments.