Effect of Remittance Inflows on Foreign Exchange Reserves in Nigeria

Nigeria is one of the largest recipients of international remittances in Africa, and understanding the relationship between remittance inflows and foreign exchange reserve management is important for macroeconomic policy. This study examines the effect of remittance inflows on foreign exchange reserves in Nigeria for the period 2005 to 2022, using secondary time-series data obtained from the Central Bank of Nigeria Statistical Bulletin and the World Bank Development Indicators database. Foreign exchange reserves were measured as total gross external reserves in US dollars, while remittance inflows were measured by officially recorded diaspora remittances. Control variables included crude oil export revenue, foreign direct investment inflows, and the official exchange rate. Autoregressive distributed lag bounds testing was applied to assess cointegration and short-run and long-run dynamics. Results confirmed a cointegrating relationship between remittance inflows and foreign exchange reserves, with remittances exerting a significant positive long-run effect (coefficient = 0.31, p < 0.05). In the short run, remittance inflows had a faster transmission effect on reserves than oil export revenues during the 2015 to 2016 oil price crisis period. The study concludes that diaspora remittances are a stable and increasingly important component of Nigeria's foreign exchange reserve buffer, particularly during periods of oil revenue shock. It recommends policy incentives to formalise informal remittance channels and maximise the foreign exchange capture from the Nigerian diaspora. Keywords: remittance inflows, foreign exchange reserves, Nigeria, diaspora, macroeconomic policy