Economic and Financial Review


Central Bank of Nigeria


International Reserves, Sovereign Risk, Optimisation, GARCH, Co-integration


The study examined the optimal level of international reserves for Nigeria that is capable of absorbing a shock similar to that experienced during the 2007/2009 Global economic crisis. Using, generalised autoregressive conditional heteroscedasticity (GARCH), vector autoregressive (VAR) estimation techniques and normalised Johansen cointegrated equation, and setting the maximum and minimum output losses for the entire period, the study found a positive relationship between the odds of default on sovereign debt and fiscal deficit to GDP ratio, short-term debt to reserves ratio and volatility in portfolio investments. In minimising the Bank's cost of holding reserves, the study found that the Nigerian economy required the minimum “core” foreign reserves level of US$32 billion to absorb adequately similar external shocks to the economy. The study found that while actual reserves had been above the optimal reserves level between 2008Q1 – 2014Q1, the average “core” reserves available to the economy was however, insufficient to absorb the adverse economic impact of financial crises, if they occur in the future. The study, therefore, recommended, amongst others, the need to block leakages to foreign reserves, facilitate fiscal consolidation and export diversification and improve the macroeconomic fundamentals of the Nigerian economy.

Author Bio

The authors are staff of the Monetary Policy Department, Central Bank of Nigeria.

Publication Title

CBN Economic and Financial Review





Recommended Citation

Tule, M.; Egbuna, S.; Abdusalam, S.; Oduyemi, A. (2017). Determination of Optimal Foreign Exchange Reserves for Nigeria. CBN Economic and Financial Review. 55(1), 27-74.



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