Foreign exchange reserves accumulation in selected countries within a regulatory framework

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Abstract

Previous studies have reported mixed findings regarding the impact of variables such as gross domestic product (GDP), nominal exchange rate, oil markets, imports, foreign portfolio investment (FPI), and foreign direct investment (FDI) in the determination of reserve holdings. This study sought to evaluate the determinants of international reserves in emerging countries within a regulated macroeconomic framework using system generalized method of moments (S-GMM) method. The results reveal that currency devaluation and terms of trade shocks negatively affect reserve demand, with devaluation having an elastic effect and trade shocks being inelastic. The fixed exchange rate regime also had an unconditionally negative effect on the size of foreign reserves of oil-producing nations in sub-Saharan Africa (SSA). Governance and anti-corruption policies as measures of institutional quality in SSA had not been effective in attracting foreign capital inflows and possibly impacted the size of foreign reserves of those economies. Oil prices, however, had an elastic and positive effect on reserves. The positive impact of oil prices emphasized the importance of oil revenue in reserve accumulation. These research findings align with previous findings. The paper contributes to the dynamic causality between foreign reserve holdings and exchange rate devaluation, in addition to testing the law of proportionate effect, which seeks to find additional patterns to predict the level of countries’ foreign currency reserves.

Keywords: Oil Prices, Size of International Reserve Holdings, Sub-Saharan Africa, Exchange Rate Devaluation, Institutional Variables, Corruption, Governance

Authors’ individual contribution: Conceptualization — D.U.; Methodology — D.U., M.A.U., A.F.A., and E.T.O.; Software — D.U., F.A.U., B.I., C.E.O., H.E.B., and B.E.O.; Validation — D.U., J.A., B.I., E.A.U., and C.E.B.; Formal Analysis — D.U., J.A., E.T.O., B.I., B.D.B., and B.E.O.; Investigation — D.U., M.A.U., C.E.O., V.E.H., and B.E.O.; Data Curation — D.U., M.A.U., and B.I.; Writing — D.U., S.M.T., B.I., C.E.B., and B.E.O.; Supervision — D.U., M.A.U., J.A., S.M.T., and E.A.U.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: C23, C56, C58

Received: 24.04.2024
Revised: 04.08.2024; 28.01.2025; 23.06.2025
Accepted: 18.07.2025
Published online: 21.07.2025

How to cite this paper: Umoru, D., Ugbaka, M. A., Atseye, A. F., Uyang, F. A., Abanbeshie, J., Omono, C. E., Takon, S. M., Omoluabi, E. T., Igbinovia, B., Ojikpong, C. E., Ushie, E. A., Bassey, C. E., Bisong, H. E., Bisong, B. D., Henshaw, V. E., & Odigbo, B. E. (2025). Foreign exchange reserves accumulation in selected countries within a regulatory framework. Journal of Governance & Regulation, 14(3), 49–61. https://doi.org/10.22495/jgrv14i3art5