The demand for foreign currencies in Nigeria: an empirical analysis

Abstract

The effective management of 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 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 effort 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 in the long run of past levels of demand, the level of liquidity logged 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.