Assessing the relationship between foreign investment flows and foreign exchange reserves in Namibia
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Date
2024
Authors
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Publisher
University of Namibia
Abstract
The purpose of this study was to examine the relationship between foreign
investment flows (FIF) and foreign exchange reserves (FER) in Namibia for the
period of 32 years, from 1991 to 2022, using exchange rate (EXR), real interest
rate (RIR), and political stability (POLSTB) as the control variables. The study
sought further to determine the nature of the relationship between the variables,
as well as the direction of causality. To attain these objectives, the study used
macroeconomic time series data and analysed them using various econometrics
tools in EViews software, version 9. In detail, the study conducted a unit root
test and found the data stationary at mixed orders [I(0) and I(1)]. Thus, the study
employed the bound test of cointegration to measure whether the variables are
cointegrated in the long-run. The results reveal that a long-run exists between
the variables. Therefore, the study applied the ARDL-ECM model to estimate
the short-run and long run relationships between the variables. In that light, the
results indicate a negative but not statistically significant relationship between
EXR and FER in both lags. Against that, the results show a positive but
insignificant relationship between RIR and FER, as well as between POLSTB
and FER in both lags. Additionally, the results also reveal a positive
relationship between FIF and FER, which is significant in lag 2, unlike in lag
1. Finally, the study employed the unrestricted Granger causality test to
establish the direction of causality between the variables. The results indicate a
unidirectional causality from EXR to FIF, while the rest of the variables are
independent of each other. Based on the results, the study recommends that
policymakers should enhance foreign investment policies aimed at attracting
and retaining foreign investment flows, sustain political stability by
implementing effective governance and institutional reforms, and diversify of
reserves management to mitigate risks and maximise returns. Finally, the study
suggests future research to examine the dynamic impacts of monetary and fiscal
policy, assess the effects of global economic trends such as commodity price
volatility, and analyse the impact of regional integration agreements on foreign
exchange reserves
Description
Thesis submitted in partial fulfilment of the requirements for the degree of master of science in economics
Keywords
Foreign exchange reserves, Foreign investment flows, Exchange rate, Real interest rate, Political stability, ARDL, ECM, Namibia