Funny, isn’t it, that whenever antagonists hear the supporters of the current administration talk about the increase in a Foreign Reserves as an achievement, they pass it off with a wave of hand and scoff with snide remarks.
But when there’s news of a slight dip in the reserve, they come out with their vuvuzelas, ululating in their usual shrill chorus: “You see, this government’s economic policy is a disaster”, “the economy is in shambles”, “yen yen yen, bla bla bla…”
Can you help but throw up your hands in exasperation when you come across this pedestrian and blanket analysis?
For example, I woke up 6:55 am today to see a friend (Paul’s) comment on my Facebook post which read: “If Nigeria has foreign reserves why borrow from China. Instead of asking HSBC to return money ask companies like NNPC to return stolen loot and overhyped budgets”
In my head, I was like “it’s too early Kunle, you have a lot to do today, you should be packing your box”
But I replied anyways: “You really have zero idea on what you’re attempting to say; if you do, you won’t talk like this, I’ll address you when I’m fully awake.”
Fast forward to 8:00 am, I am fully awake so as I prepare my coffee I decided to write this piece on what Foreign reserve is and what it does.
This is me going contrary to what my other friend Dauda advised in his comment 47 minutes ago: “If I were you, I won’t answer that question, an average educated individual should try to find out a little bit about economics since our lives revolve around economics. Haba”
Dauda, I understand your vexation, most nights I get analysis paralysis just by reading or watching highly opinionated thoughts on economic matters.
Before we address the elephant in the room, “Why Foreign Reserves dropped to $45 billion dollars”; it is necessary to have a grasp at the concept of Foreign Reserves.
What is Foreign Reserves?
Foreign-exchange reserves (also called Forex reserves or FX reserves) is money or other assets held by a Central Bank or other monetary authority so that it can pay its liabilities when needed, such as the currency issued by the Central Bank, as well as the various bank reserves deposited with the Central Bank.
Foreign Reserves (FR) is basically the current revenue of the Federal Government‘s Forex Earnings and it’s an account used for Federal Allocation to States and Local Government under the FAAC Act.
Foreign Reserves is also an indicator of a country’s economic strength because it reflects the earning power of all states operating in the global market.
For example, a country like China with $3.1 trillion in Foreign Reserves can be said to have more global purchasing power than any other country in the world. So your ability to increase your revenue base as a State will reflect in the strength of your currency. But holdup, wait a minute, before we go hats in hand and arms out-stretched, China is not anybody’s mate, she’s 3,000 years old; so chill with the comparison.
Nigeria earned a total of $903.1 Billion dollars from Crude Oil alone from 1990–2014 (24 years), yet still requires $95 Billion yearly investment to bridge the infrastructure gap. And, it gets worse, within 9 years from 2005 to 2014, according to NEITI report, $200 Billion dollars had gone through what we call the Excess Crude Account (ECA).
Before we go further, what is ECA? Excess Crude Accoount is basically the difference between Expected Revenue and Earned Revenue. For example, Federal Government in its budget year expects to earn — in Davido’s voice — “$30 Billion for the accountiyo”, but actually earned $40 Billion, the $10 Billion difference goes into that account, in case of rainy a day. However our leaders would rather spend it on “Versace and Gucci for their body o baby”, “so no do, no do, gra-gra for them.”
What happened to $200 Billion from 2005–2014? Can we account for it? To get the power sector at optimum capacity of 100,000 Mws for the Country you’ll require $100 Billion investment, that’s why Buhari asked one of the usual suspects “Where is the power?”
Back to the elephant in the room “Why did the Foreign Reserves drop to $45billion?”
Here is a bit of history and context; before May 29 2015 hand-over, what was current in the Nation’s Foreign Reserves was $29 billion and that’s amidst the plunge in Crude Oil price from $110- $23 per barrel. In addition, there was no savings to serve as a shock absorber, so naturally the law of demand and supply took its course in a country that is dependent on importation of basic things like rice and toothpicks.
On demand and supply of currencies, if your Naira exchange value is, say N1 to $1 dollar in the exchange market and you used to have $900 in your account to fund your import habit, but overtime that account was mismanaged and reduced to $29 what do you expect?
Say you need to import something worth $100 which is higher than what you can supply ($29), those with more dollars in their reserves will sell to you at their own rate, they can collect N10 from you to exchange for their $1 dollar and that will definitely cause Inflation in your economy.
Inflation is basically the rise in price of goods and services, so if importers used to import my “Versace belt” at an exchange rate of N1 for $1, that is possible because my Foreign Reserves can Fund that exchange at an equal value of N1 for $1.
But once my FR is weak because I’m not earning enough to fund my import habit, the price of my exchange will definitely change because those who have it will sell to me at a higher exchange rate of, say N10 for $1, that will make the price for my Versace inflate from N1 to N10.
Naturally, I’ll get upset because buying that Versace will take out of my purchasing power for other goods and services.
So, was it unexpected that Nigeria would be hit with recession? I saw the indicators since 2014 as an undergraduate, the Forex crises in 2016 didn’t come to me as a shock. However, the administration had to take a number of measures like the policy on 41-items-ban so it can funnel the meager Forex funds — ordinarily used for those 41 items — into Importation of goods and services for a more productive sector like Manufacturing and Agriculture.
It also created an Open Forex Trading Window call Nafex-Nifex which allowed foreign investors to trade in currencies.
Thankfully, all these measures helped ease the alarming rate of inflation while the price of crude oil was picking up.
I’ll tell you for free; the paradox of a mono-economy is that you’ll need the income from that “one source” to diversify.
Nigeria’s current Forex Reserves is $45 Billion, it used to be $48 Billion as of April this year, it rose by nearly 100% from what it was in 2015. So to put things in perspective, CBN has been intervening in the Forex Market since 2017, it has pumped $23.2bn into the Forex Market within 17 Months with the aim of stabilizing the Naira against the dollar.
The result is shown in Spectator Index of currency performance against dollars which reported Nigeria as having lost the least, in comparism with other currencies in conversion rate to the dollar (at -01%, ahead of Uk at -0.3%, Japan at -0.9%, Euro 1.8%.)
So, I urge Nigerians to be patient, this is the first time we got the head of the fish right, President Buhari is honest and prudent.
He is not a thief, so we can trust his administration to some degree while ensuring that we hold all our state actors to accountability; from the Executive to the Legislature and the Judiciary. My train ride to Kaduna just ended so I must end this on a note that Buhari deserves a second chance to consolidate on the achievements in bridging the Infrastructural gap.
Written by Kunle Somoye.
Kunle321@gmail.com
@MrSomoye
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