DYNAMIC EFFECTS OF BLACK TAX AND FOREIGN EXCHANGE RESERVES ON EXCHANGE RATE IN NIGERIA: EVIDENCE OF A MODERATING ROLE USING THE GMM APPROACH.

The increasing wave of relocation by successful black professionals from developing countries to more developed economies in search of better economic opportunities has led to increased remittance back home to support friends and extended families. The effect of these remittances, otherwise called the black tax, on the exchange rate, and its moderating effect on the stabilization role of the reserve on the exchange rate are yet to be fully established in the literature. This study therefore tested the isolated effect of the black tax on exchange rate, the effect of reserve on exchange rate and the moderating effect of black tax on the stabilization role of reserve on exchange rate in Nigeria. The study’s data represent Nigeria economic data from 1981 to 2024, obtained from the Central Bank of Nigeria Statistical Bulletin. The study modelled the exchange rate as dependent on reserves, current transfer (black tax), the interaction variable between reserve and current transfer, and control variables of number of commercial bank branches (financial inclusion), money supply, Gross Domestic product, interest rate and trade balance. Results indicate that increases in reserve (-176.9671, P=0.2439) money supply (-345.191, P=0.2764)) and trade balance (-1.00E-12, P=0.8444) are associated with appreciation of the Naira, while increases in black tax (1.36E-11, P=0.1018), GDP (317.3012, P=0.1495), number of commercial bank branches (10.16075, P=0.8331) and interest rate (3.373, P=0.78) are associated with depreciation of the naira. When isolated, an increase in black tax depreciates the Naira. However, its moderating role strengthens the stabilizing effect of the reserve on exchange rate (-9.07E-12). However, this moderating effect is not significant (0.1822 at 10%,) just like all other exogeneous variables. The study recommended the encouragement of export earnings from oil and non-oil sources, an integrated management of diaspora remittances and reserves, reduction in transaction costs of diaspora remittances, investment in small and medium scale enterprises and promotion of digital financial services.