FOREIGN EXCHANGE INTERVENTION AND EXCHANGE RATE MOVEMENT IN NIGERIA

ABSTRACT : This study was set to evaluate the impact of the foreign exchange intervention of the Central Bank of Nigeria (CBN) on exchange rate movement in Nigeria, in view of the prevailing instability in the foreign exchange market in Nigeria, even in the face of enhanced intervention of the Bank in the market. The study adopts  the framework of a co-integrating autoregressive distributed lag (ARDL) model, using monthly data, spanning the period 2017M4 to 2022M6, and sourced from the statistical bulletin of the CBN. Findings from the study suggest that the CBN interventions in the foreign exchange market do not significantly impact the movement in exchange rate in Nigeria in both the short- and long-run. This finding raises questions about the need to sustain the interventions, given the impact it has on the external reserves of the country. However, the long-run impact of external reserves on exchange rate suggests that reserves accumulation is consistent with currency appreciation. This, however, is not the case in the short-run, as the short-run impact of external reserves on exchange rate is insignificant, both contemporaneously and for most of its lags. Terms of trade, on the other hand, appears to drive appreciation of exchange rate in the short-run, though its impact of exchange rate in the long-run is statistically insignificant. The study recommends that the CBN discontinues the interventions in the market, and rather explore better options of sustaining the net inflow of foreign capital to Nigeria. This may include providing foreign currency dominated securities, with very competitive naira-based interest rates, for retail investor. This would attract inflow of foreign exchange, for Nigerians both resident in the country and abroad, resulting in a moderation in the foreign exchange market pressure.
KEYWORDS: Foreign Exchange Intervention, Foreign Exchange Market, Exchange rate, External Reserves, ARDL model.