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Effects of Government Expenditure on Foreign Exchange Reserves: Evidence for Namibia

Author

Listed:
  • Victoria Manuel

    (Bank of Namibia, Research and Financial Sector Development Department, Windhoek, Namibia.)

  • Daisy Mbazima-Lando

    (Bank of Namibia, Research and Financial Sector Development Department, Windhoek, Namibia.)

  • Erwin Naimhwaka

    (Bank of Namibia, Research and Financial Sector Development Department, Windhoek, Namibia.)

Abstract

The study empirically investigated the effects of government expenditure on FX reserves in Namibia. Using quarterly data, the study applied the Autoregressive Distributed Lag (ARDL) cointegration technique to examine the relationship between FX reserves and government expenditure, the exchange rate, external borrowing, current account balance and M2 over the period ranging from 2002 to 2020. The results show that an increase in government expenditure reduces FX reserves. Furthermore, increase in foreign debt, current account balance and M2 increases the level of FX reserves, while an appreciation of the effective exchange rate reduces FX reserves. The study, therefore, concludes that high government expenditure and increase in foreign borrowing impacts FX reserves. These findings suggest that developments in government expenditure may hinder monetary policy effectiveness. Based on these findings, the study recommends the continuation of fiscal consolidation to reduce fiscal deficits and government debt. Similarly, it is important to ensure macroeconomic balance and appropriate coordination between fiscal and monetary policies.

Suggested Citation

  • Victoria Manuel & Daisy Mbazima-Lando & Erwin Naimhwaka, 2023. "Effects of Government Expenditure on Foreign Exchange Reserves: Evidence for Namibia," International Journal of Economics and Financial Issues, Econjournals, vol. 13(1), pages 172-183, January.
    • Handle: RePEc:eco:journ1:2023-01-18
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    References listed on IDEAS

    as
    1. Huang, Tai-Hsin & Shen, Chung-Hua, 1999. "Applying the seasonal error correction model to the demand for international reserves in Taiwan," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 107-131, January.
    2. Gergely Baksay & Ferenc Karvalits & Zsolt Kuti, 2012. "The impact of public debt on foreign exchange reserves and central bank profitability: the case of Hungary," BIS Papers chapters, in: Bank for International Settlements (ed.), Fiscal policy, public debt and monetary policy in emerging market economies, volume 67, pages 179-191, Bank for International Settlements.
    3. Mile Bošnjak & Vlatka Bilas & Gordana Kordić, 2020. "Determinants Of Foreign Exchange Reserves In Serbia And North Macedonia," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 65(226), pages 103-120, July – Se.
    4. Barbara Annicchiarico & Giancarlo Marini & Giovanni Piersanti, 2011. "Budget Deficits and Exchange-Rate Crises," International Economic Journal, Taylor & Francis Journals, vol. 25(2), pages 285-303.
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    More about this item

    Keywords

    Foreign Exchange reserves; Government Expenditure; Namibia;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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