BACKGROUNG OF THE STUDY
External Reserves are called foreign reserves or Foreign Exchange Reserves. The definition of international reserves as proposed by International Monetary Fund in its Balance of payments Manual, 5th edition as consisting of official public sector foreign assets that are readily available to and controlled by the monetary authorities for direct financing of payment imbalances, and directly regulating the magnitude of such imbalances, through intervention in the exchange markets to affect the currency or Naira exchange rate. Balance of payment on the other hand is the record of transaction between the residents of a country and the residents of other countries of the world. Both Nigeria external reserves and balance of payments are the instruments used by the monetary authority to shape the economy of the country, the mechanism and the operation of these instruments as well as how the Naira value continues to depreciate as against other currencies particularly the Dollar is what influenced the writer to carry out this study. The study will further establish the relationship between the external reserves and balance of payment as used by the Central Bank of Nigeria, and also the contributions made towards the development of Nigeria.
1.2 Statement of the Problem
Nigeria’s External Reserves derived mainly from the proceeds of crude oil production and eventual disposals. These Reserves apart from paying for the International debts and other financial obligations, it is also used for Investment in Infrastructural development in the country provision of steady power and water supplies as well as good road and communication networks is very crucial. But unfortunately, power has been epileptic, good drinking water is a myriad and our road is full of pot holes. Oil is a wasting asset and would be dried someday, this poses a very big challenge to reserve management in Nigeria as to what would become of the economy when this single most important source of National Income is fully depleted, or that demand for the country’s oil is reduced drastically as witnessed in the recent times where the price of the oil in the international market is low and cannot be matched with the budget bench mark. This poses a serious problem to the economy.
Even if diversification of the economy is to be adopted, what form of diversification is desirable? How much of the reserve should be spent on diversification? In Nigeria, the culture of fiscal indiscipline characterized by unnecessary spending, to a new dawn of prudent consumption and savings, both are typical of not only the Nigerian economy but of all emerging and developed
economies of the world. Would currency swap as is being currently discussed with China saved our problems? Can this transform the desired Infrastructural development? What alternative is put in place should there be a failure? How much should be spent and how much to save, in order to manage inflation and excess liquidity and to attain optimal consumption and savings. Consumption should depend on the absorptive capacity of the economy; absorptive capacity is somehow problematic and determination of the level of consumption; Are the reserve spent on wastes or personal enjoyment? How do we ensure accountability and transparency in managing consumption and savings? Erosion of purchasing power of the local currency (Naira) and high inflation rate resulting from lack of adequate reserve are some of the problems being faced.
1.3Objectives of the Study
The aim of this study is to evaluate the nature of relationship between the External Reserves and Balance of Payments and to see how these two parameters had been used over many years (1995-2014) to depict the trend of the monetary policies of a nation with a special reference to Nigeria.
The specific objectives are:
To examine the nature of relationship between the External Reserves and Balance of Payment of Nigeria over the period of twenty years (1995-2014).
To find out the rate of growth and development that the External Reserves and balance of payment have brought about in the country.
To check whether exchange rate is a determinant factor of external reserve and balance of payment.
1.5 Statement of Hypotheses
In this study, Hypotheses are:
Ho1: There is no significant relationship between External Reserves and Balance of Payment in Nigeria.
Ho2: Exchange rate is not a determinant factor of External Reserves and Balance of payment in Nigeria.
Ho3: External reserve and balance of payment does not affect growth and Infrastructural development in Nigeria.