Why Nigeria’s Eternal Reserves Is Being Depleted Nigeria’s External Reserves stood at US$39,294,729,906.2 as at March 7, 2014. It has been on a downward plunge of late. What is responsible for this and what can the managers of Nigerian Economy do? These are the reasons for the depleting eternal reserves: 1) Dwindling Revenue About 90% of Nigeria’s foreign revenues come from the sale of crude oil. The crude oil production has been on the decline in recent times due primarily to oil theft. Even though the international crude oil prices have remained above $100/barrel on the average, oil output remains far below the budgeted target, thereby leaving little or nothing to save as eternal reserves. 2) Intervention/ defense of the Naira The five cardinal objectives of the Central Bank of Nigeria (CBN) are: 1. ensure monetary and price stability; 2. issue legal tender currency in Nigeria; 3. maintain external reserves to safeguard the international value of the legal tender currency; 4. promote a sound financial system in Nigeria; and 5. act as Banker and provide economic and financial advice to the Federal Government. It is in pursuant of maintaining and safeguarding the value of the Nigerian legal tender – the Naira – that the CBN has been using the external reserves in intervening at the foreign exchange Dutch Auction exercises. 3) Increase Expenditure The infrastructural deficits of the Federal Government are becoming more obvious with time. With less than one year to the end of the present administration and given the buoyed opposition that’s gaining relevance, the Federal Government is being stampeded into ensuring that it keeps to its promises of providing jobs, security, conducive business environment and socio-economic infrastructures. These are putting pressure on the government with regards to saving for the future or solving urgent and important problems. Accretion to the eternal reserves is taking the hit. 4) Speculation on impending devaluation Ijeoma Nwogwugwu of Thisday Newspaper in a piece titled “Naira Under Attack” posited that “A rigorous review of the market as well as discussions with the foreign exchange dealers of banks have confirmed that the nation’s currency is under speculative attack by foreign investors. These investors have simply taken advantage of Nigeria’s relaxed laws on the free movement of capital into and out of the economy and the central bank’s eagerness to please and meet the demands of these investors who have been shorting the naira… Through this corrupted system of round tripping they therefore make quicker gains. They achieve this by importing capital every two or three days and converting it to naira under the pretext that they are fresh inflows meant for investment in the equities and bond markets. But instead of investing in equities or TBs, they enter the interbank market and quote to buy forex at high rates; they then wait for the market to overheat due to the unavailability of forex to meet their demands. Expectedly, this ploy by the investors compels the central bank to intervene through the sale of forex to the interbank bank. And as the naira gains in value, these investors buy forex at a lower rate of exchange, thus making a kill in the process. This vicious cycle of shorting the naira or round tripping has seen them make massive gains for weeks on end”. 5) Corruption Corruption is better perpetrated in US Dollars than in Nigerian Naira for obvious reasons. With one dollar equating about N160 – N170, more volume and value can be accommodated. It can easily be transferred without raising much suspicion. It can easily be stored at home and other places. It helps to by-pass all regulatory requirements associated with the naira. It is therefore the preferred currency for corruption. As election period draws closer, the need for dollars keep increasing, thus, the reason for the insatiable demand for the greenback. 6) Election (2015) Corollary to the above point, politicians with various and varied political ambitions have started stock-pilling funds (mostly in dollars) for electioneering campaigns for the upcoming elections (especially the 2015 General Elections). Government expenditures (all tiers of government) will surely spike this year. While few of these projects will be to genuinely meet election promises that will endear politicians to their voters, most spending are expected to be conduits for bribery and corruption which will ultimately be transacted and stored in dollars. CBN will continue to deplete the external reserves to meet all these demands. 7) Possible Devaluation How long will the CBN continue to fight the losing battle of defending the Naira at all cost? Analysts, discerning investors and businessmen are betting against the CBN. Given the way and manner previous devaluations affected businesses in the past, their fears are not unrealistic. These self-fulfilling prophesies are enough to sustain the cycle of pessimism and when combined with the other discussed factors, it is easy to see how accretion to the external reserves may not happen any time soon. 8) Tapering by FED/ Capital Flight Tapering can be defined as a gradual winding down of central bank activities used to improve the conditions for economic growth. Tapering activities is primarily aimed at interest rates and investor expectations of what those rates will be in the future. These can include conventional central bank activities, such as adjusting the discount rate or reserve requirements, or more unconventional ones, such as quantitative easing (QE). As the US economy continues to improve, the Federal Reserves are reversing the quantitative easing which leads to better rates and returns. This consequently results in foreign investors in the Nigerian stock and money markets liquidating their investments and repatriating their funds and of course, this is done in US dollars. Michael Ogbaa
Posted on: Mon, 17 Mar 2014 17:16:59 +0000
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