Welfare Effect of External Reserves Management in A Resource Dependent Economies: Evidence from Nigeria

Itoro M. Ikoh; NseAbasi I. Etukafia; Sylvanus Udoh

doi:10.56201/ijefm.v11.no3.2026.pg189.210

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Welfare Effect of External Reserves Management in A Resource Dependent Economies: Evidence from Nigeria

Itoro M. Ikoh, NseAbasi I. Etukafia, Sylvanus Udoh,

Abstract

This study investigates the welfare effects of external reserves management in a resource- dependent economy, with Nigeria as a case study, over the period 1981–2023. Recognizing that external reserves serve not only as a buffer against external shocks but also as a policy instrument for stabilizing exchange rates, sustaining imports, and supporting consumption, the study explicitly examines their impact on household welfare, proxied by real personal consumption expenditure per capita. Using annual macroeconomic data from the Central Bank of Nigeria, National Bureau of Statistics, and World Development Indicators, the study employs the Autoregressive Distributed Lag bounds testing approach to capture both short-run and long-run dynamics, complemented by an error correction model to assess adjustment to equilibrium. The results reveal that external reserves management has a strong and statistically significant positive effect on welfare in both the short and long run, with elasticity close to unity, indicating that improvements in reserve adequacy translate almost one-for-one into higher real consumption. Inflation negatively affects welfare, while oil revenue and government expenditure exhibit weak or marginal effects, highlighting the limitations of resource dependence and fiscal policy in translating macroeconomic gains into household well-being. Exchange rate stability shows mixed short-run effects but is insignificant in the long run, suggesting that reserve adequacy, rather than nominal exchange rate management alone, is critical for welfare. Diagnostic and stability tests confirm the robustness of the ARDL–ECM estimates. The findings underscore the importance of prudent, policy-driven reserves management as a tool for consumption smoothing, income stabilization, and welfare enhancement in resource-dependent economies exposed to external shocks.

References

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Welfare Effect of External Reserves Management in A Resource Dependent Economies: Evidence from Nigeria

Abstract

References

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