IMPACT OF FOREIGN EXCHANGE RESERVES ON INFLATION IN SELECTED SUB-SAHARAN AFRICAN COUNTRIES

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Published Dec 31, 2024
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Vol. 7 No. 2 (2024): December 2024

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Emmanuel Chukwuekwu UWAIFO
Department of Economics, University of Delta, Agbor, Delta State, Nigeria
Matthew Chinedum EZEH
Department of Economics, Dennis Osadebay University, Asaba, Delta State, Nigeria
https://orcid.org/0009-0000-1840-6664

Abstract

The continuous rise on inflation rate particularly in Sub-Saharan African countries in recent time has been questionable, which has affected all sectors of the economies of Sub-Saharan African countries. It has become pertinent given the rise on inflation to examine how external reserves has affected inflation and also question the accumulation of reserves that would have been channelled into industrialization to reduce the high rate of unemployment and promote investment in sub-Saharan African countries. This study examined foreign exchange reserves and its effects on inflation in selected Sub-Saharan African countries. Data spanning between 1990 and 2023 from Twenty (20) Sub-Saharan African countries were used and Fixed Effects Panel technique of analysis was adopted for the study. The findings of the study show that while both external reserves accumulation (RESV) and world oil price (WOP) have negative relationships with inflation, the relationship is statistically significant only in the case of RESV. On the other hand, although both money supply (M1) and exchange rate (EXR) indicate positive relationships with inflation, only M1 has a statistically significant relationship. From the findings of this study, therefore, it is concluded that foreign exchange reserve accumulation reduces the level of inflation significantly in Sub-Saharan African countries. The study recommends among others that although foreign reserves may not be inflationary, it is imperative that reserves be channelled into productive investments and infrastructural development to promote resilience and sustainability in African countries rather than accumulating foreign exchange reserves.

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