1.0 Introduction
1.1 Background of Study
The recent build up in the nation's external reserves was attributed mainly to the upsurge in oil prices sustained by fiscal prudence. The quest to mitigate the burden imposed by high oil prices on the economy is driving research into the exploitation and utilization of alternative energy sources. External reserves have increased significantly and quite rapidly in recent years. This phenomenal growth is a reflection of the enormous importance countries attach to holding an adequate level of international reserves. External reserves are variously called international reserves, foreign reserves, or foreign exchange reserves.
External reserves consists of official public sector or foreign assets that are readily available to and controlled by the monetary authorities for direct regulating the magnitude of such imbalances through the interventions in the exchange markets to affect the currency exchange rate and for other purposes.
Nigeria's external reserves comprise of three components namely; the federation, the federal government, and central bank of Nigeria portions. The federal components consist of sterilized funds held in the excess crude accounts at the CBN belonging to the three tiers of government. This portion has not yet been monetized for sharing by the federating units. It is sometimes ignorantly referred to as the reserves of the country.
The federal government components consists of funds belonging to some government agencies such as the NNPC; for financing its joint venture expenses, PHCN and ministry of defense ; for letters of credit opened on their behalf etc. The CBN portions consists of funds that have been monetized and shared. This arises as the bank receives foreign exchange inflows from crude oil sales and other oil revenues on behalf of the government.
One of the key challenges for Nigeria over years was how to manage the phenomenal growth in foreign exchange reserves resulting from the sustained high international oil prices. The size of the reserves which has been stimulated by the impressive high prices of crude oil has generated disagreements among the stakeholders. The focus of the disagreement is about the channels of utilization of the reserves, especially alternative investment outlets, it could be channeled into.
Nigeria's foreign exchange reserve is derived mainly from proceeds of crude oil production and sales. Its case has been different especially between 2006 and 2010. The decline over the past years, despite rising oil prices has raised questions about the quality of the government's economic management.
Conventionally, Countries hold external reserves in foreign currencies in order to maintain a desirable exchange rate policy by interfering significantly in foreign exchange markets. The main reasons for holding external reserves include; Foreign exchange market stability, exchange rate stability, exchange rate targeting, emergency such as disaster, etc.
In this study, our interest is to determine the appropriate model suitable for the Nigeria External Reserves, determine the trend equation of the Nigeria External Reserves, estimate and assess the seasonal effects of the Nigeria External Reserves from 2000-2014 using the Buys Ballot procedure.
1.2 Statement of Problem
Nigeria's dependence of oil for over 90% of its foreign exchange earnings makes its capital vulnerable to the fluctuations in crude oil prices. These fluctuations has affected External reserves of the country especially since the beginning of 2000. Consequently, this has generated lots of interests and debates among the members of the public on how the reserves should be managed. The researcher will model these fluctuations (mathematically) in order to understand the trend of the reserves and also inform the public, through this research about the state of affairs in this regard.
1.3 Aims and Objectives
The main aims and objectives of this study includes;
- To determine appropriate model suitable for the Nigeria External Reserves.
- To determine the trend equation of the Nigeria's External Reserve.
- To estimate and assess the seasonal effects of the Nigeria's External Reserves from 2000-2014.
- To predict and forecast the Nigeria External Reserves values
1.4 Scope of Study
In this study, we will examine only the External Reserves in Nigeria from the period of 2000-2014. The data collected for this study is a secondary data from the annual statistical bulletin of Central Bank of Nigeria (CBN).
1.5 Significance of Study
The quest to lessen the burden imposed by high oil prices on the economy of Nigeria is driving research into exploitation and utilization of alternative energy resources. Hence this research work will;
- Provide an empirical effect on the growth of the External Reserves in Nigeria.
- Enable us know how External Reserves in Nigeria rise and fall with respect to seasons from 2000-2014.
1.6 Definition of Terms
External Reserves:
This consists of official public sector foreign assets that are readily available to and controlled by the monetary authorities for direct financing of payments imbalances and directly regulating the magnitude of such imbalances through the intervention in the exchange markets to affect the currency exchange rate for other purposes.
Foreign reserves:
This is a substantial foreign assets of consistently stable currencies such as reserve currency like dollar, Euro etc.
Reserve Management:
This is a process that ensures that adequate official public sector foreign assets are readily available to and controlled by the authorities for meeting a defined range of objectives for a country or union.
Time series:
Time series as a stochastic process is an ordered sequence of observations. i.e A collection of observations made sequentially in time.
Trend:
This refers to a long term change in the mean of time series. This shows the general direction in which the graph of the time series is going over a long period of time.
