An examination of the relationship between foreign exchange reserves and economic stability in Nigeria: A study of the CBN (2000–2020).
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Background of the Study:
Foreign exchange reserves serve as a buffer against external economic shocks and play a vital role in ensuring a country’s economic stability. In Nigeria, the Central Bank of Nigeria (CBN) has managed these reserves to stabilize the naira, support monetary policy, and maintain investor confidence. Over the period 2000–2020, fluctuating global economic conditions and volatile oil prices have necessitated robust reserve management practices. The CBN’s policies have aimed to build and utilize foreign exchange reserves effectively to mitigate the impact of external shocks, stabilize the exchange rate, and support domestic economic activities (Obiora, 2023). By doing so, the central bank has attempted to ensure macroeconomic stability and foster a favorable environment for economic growth. However, challenges such as inconsistent reserve accumulation strategies and external vulnerabilities have sometimes undermined these efforts (Akinola, 2024). This study examines the relationship between foreign exchange reserves and economic stability in Nigeria, evaluating the role of the CBN in managing these reserves and their effectiveness in stabilizing the economy during periods of external uncertainty (Chisom, 2025).
Statement of the Problem:
Despite the strategic importance of foreign exchange reserves, Nigeria has experienced episodes of economic instability linked to volatile reserve levels. The CBN’s reserve management policies have occasionally been insufficient to buffer against external shocks, leading to exchange rate volatility and inflationary pressures (Obiora, 2023). Such instability undermines investor confidence and hampers sustainable growth. The study aims to identify the key factors that influence the effectiveness of reserve management and to assess their impact on Nigeria’s economic stability (Akinola, 2024; Chisom, 2025).
Objectives of the Study:
• To analyze the relationship between foreign exchange reserves and economic stability.
• To evaluate the effectiveness of CBN reserve management policies.
• To propose measures to enhance economic stability through improved reserve management.
Research Questions:
• How do foreign exchange reserves affect economic stability in Nigeria?
• What challenges hinder effective reserve management by the CBN?
• What policy measures can improve the stabilizing function of foreign exchange reserves?
Research Hypotheses:
• H1: Higher levels of foreign exchange reserves contribute to greater economic stability.
• H2: Inconsistent reserve management policies negatively impact economic stability.
• H3: Improved management practices enhance the effectiveness of reserve utilization.
Significance of the Study:
This study provides critical insights into the role of foreign exchange reserves in promoting economic stability in Nigeria. Its findings will inform CBN policy adjustments and contribute to strategies that mitigate external shocks and support sustained economic growth (Obiora, 2023; Akinola, 2024).
Scope and Limitations of the Study:
This study is limited to examining the relationship between foreign exchange reserves and economic stability in Nigeria, with a focus on CBN policies and macroeconomic indicators.
Definitions of Terms:
• Foreign Exchange Reserves: Assets held by a central bank in foreign currencies.
• Economic Stability: The consistency of an economy in maintaining growth, low inflation, and low unemployment.
• Reserve Management: The strategies employed by a central bank to accumulate and utilize foreign exchange reserves.
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