Nigeria's External Reserves: A Time Series Approach

Abstract

A nation's economy can withstand shocks and increase confidence by using its external (foreign) reserves. Therefore, external reserves are significant to the extent that they aid in maintaining economic stability in the nation. The study looked into Nigeria's external reserves using time series technique. It made use of monthly data on Nigeria's external reserves from January 1990 to August 2021, which were sourced from the Central Bank of Nigeria (CBN) bulletin. The aim of the study was to investigate the external reserve pattern of Nigeria and fit a suitable time series model to the data. The Box-Jenkins methodology was utilized, encompassing four distinct stages: identification, estimation, diagnostics, and forecasting. The data was determined to be non-stationary at the initial level and displayed an upward trend. Upon initial analysis with diagnostic economic tools, it was discovered that the data consistently maintained a state of equilibrium, that is, at first difference. Additionally, model diagnostic checking showed that Autoregressive Integrated Moving Average, ARIMA (4, 1, 4) was the most suitable optimal model, and as such, it was used to forecast for the following four years. As a result, the projected figures showed that Nigeria's external reserves will keep rising gradually. Legislative actions that will facilitate improved external reserve management and accumulation are therefore recommended for the government to take.