Reserves Accumulation and the Estimation of the Adequacy Level for Nigeria

Nigeria’s foreign exchange reserves, which was US$5.4 billion in 1999, rose to an overwhelming level of US$51.3 billion at end-2007 and further to US$53.0 billion in 2008, but owing to the crash in the international price of crude oil in 2008 and the aftermath of the global financial crisis, the reserve declined to US$42.4 billion in 2009. In trying to determine the optimum level, the paper adopted Shcherbakov (2002) model which estimated the level of international reserves adequacy along the line of the drivers of external reserves. We found that there have been shortfalls in the achieved level of reserves over the year, the actual levels of reserves fell below the estimated trigger levels, except in the period 1992 – 2005. However, from 2006 through 2009 external reserves were in excess of actual reserves, especially in 2006 and 2007. The result reveals that the reserves accumulation in recent years was in line with global trend especially in emerging economies and could not be adjudged to be sufficient or in excess of expectations. Government should sustain reserves accumulation during oil boom to guard against any external shock, especially crude oil price shock.