Foreign Reserve Accumulation Amidst Joint Shocks: Evidence from Exchange Rate Uncertainty and Oil Supply Shock in MENA Region
Abstract
Despite significant research on oil price shocks and exchange rate dynamics, most studies examine these factors independently and focus on average effects, while conventional policy structures often treat these risks as weakly correlated, ignoring the compounding double-hit effect of synchronized shocks. This study aims to fill this gap by exploring the joint, asymmetric, and state-dependent impacts of oil supply shocks and exchange rate uncertainty on foreign reserve accumulation in five MENA economies (Saudi Arabia, UAE, Qatar, Egypt, and Tunisia) from January 2000 to December 2025. Specifically, we investigate the extent to which foreign reserves serve as a buffer amidst the joint impact of oil supply shocks and exchange rate uncertainty in the MENA region. Using an integrated empirical framework, the study combines an Interacted Panel Vector Autoregression (IPVAR) to capture dynamic mean-level responses, panel quantile regression to reveal heterogeneity across reserve regimes, and a panel GARCH-Copula approach to model nonlinear volatility and tail dependence. The empirical results reveal that the buffering capacity of reserves is non-linear and highly sensitive to initial conditions. Exchange rate uncertainty induces a 15.3% contraction in reserves over 24 months, while negative oil supply shocks trigger disproportionately large reserve drawdowns (28.3%), far outweighing the accumulation seen during price booms (8.7%). Significantly, quantile analysis demonstrates that the buffering effect is weakest in reserve-scarce economies, which respond seven to eight times more intensely to shocks than high-reserve counterparts, thereby highlighting strong heterogeneity. Copula estimates confirm a significantly lower-tail dependence (?L = 0.38), indicating that extreme shocks are synchronized rather than independent disturbances. The findings demonstrate that reserve vulnerability in MENA economies is highly nonlinear, with the greatest magnitude when reserves are low. Accordingly, relying on static reserve adequacy benchmarks driven by baseline scenarios is insufficient; instead, MENA policymakers should adopt dynamic, state-contingent reserve management frameworks that explicitly account for tail-risk synchronization and the diminishing buffers during compounding economic or financial shocks.
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Copyright (c) 2026 David UMORU, Beauty Igbinovia, Mohammed I. Umole, Timothy Igbafe ALIU
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