A Chinese economist and writer, Xiao Zhuoji, once states in his analysis, the importance of external reserves to an economy that the rise in foreign reserves demonstrates the strength of economy. But the extraordinary growth has also had some negative impact and brought with it foreign exchange rate risk.
External reserve in the analysis of International Monetary Fund (IMF) is that consisting of official public sector foreign assets that are readily available to, and controlled by the monetary authorities, for direct financing of payment imbalances, and directly regulating the magnitude of such imbalances, through intervention in the exchange markets to affect the currency exchange rate and/or for other purposes.
External reserve could be held for several purposes, among which are stated in the analysis of Central Bank of Nigeria as: to serve as formal back up for the domestic currency and safeguard the value of the domestic currency, timely meeting of international payment obligations such as to finance international trade which gives rise to demand for liquid reserves that can readily be used to settle trade obligations, wealth accumulation portfolio for future consumption purposes, to boost a country’s credit worthiness and provide a cushion at a time when access to the international capital market is difficult or not possible; to Provide a fall back in case of fall in revenue, to provide a buffer against external shocks or unforeseen emergencies and natural disasters.
After the transition of power from military to democratic-based government, Nigerians has witnessed a lot of internal crises and debates on external reserve. For instance, between 2005 and 2006, formal president Olusegun Obasanjo, was summoned to a panel before the nation assembly for the illegal withdraws of billions of naira from our external reserve in the name of some settlements such as payment to Paris Club creditors to eliminate Nigeria’s debt, payment in support of Niger-Delta power plants establishment and withdrawal for emergency fund to support Census 2006. The allegation is that these monies were not authorized by the National Assembly.
Recently, the PDP presidential aspirant and formal vice president, Atiku abubakar in his speech at the party’s convention gives a brief and awful description of Nigeria economic situation between 2007 and to date that it is mostly worrisome the depletion of the Excess Crude Account from $22 billion to $470 million with no corresponding projects associated with the spending and most of which have gone into recurrent spending. In this case, billions of Naira has been dispensed from our foreign reserve not on capital projects that could yield the country timely growth and development.
Alhaji Atiku added that the current situation is also being exacerbated by the rapid depletion of the external reserves with not much to show for it in terms of infrastructure and economic development
The situation said to have gone beyond the regulatory capacity of the Central Bank; as the CBN’s intervention in raising the MRR (minimum rediscount rate) by 25 basis points has not helped the situation since rates were raised, another $2.7 billion have gone from the reserves.
In the early 2007, formal Central Bank of Nigeria (CBN) governor, Professor Chukwuma Charles Soludo announced that the country’s foreign reserve have risen by nearly four percent as at December 2006 41.96 billion in December last year to $43.43 billion in May this year, a rise of 3.6 percent. Soludo noted the reduction in steady growth of external to have resulted from the crisis in the Niger-Delta leading to the decline in volume of oil production. In an effort to result this crisis, the late president Yar’Adua made a provision for the region. However, the implementation of such went abortive.
Against Soludo statement also, the central bank of Nigeria’s former deputy governor, who was being screened for a ministerial appointment by the Nigerian senate states that the net amount available in Nigeria’s foreign reserve for distribution among the three tiers of government was just $8.8 billion as against the $43.6 billion we all used to know as at last month. This left the nation with more confusion.
From these accounts so far, one can logically derived that our external reserve has been mismanaged. If not, Nigeria’s financial situation was expected to become increasingly stable by enhancing its full participation in the global economy. Tunde Adelakun (2007) reported that the suspicion that Nigeria’s foreign reserves might have been tampered with was however, heightened by the last minute contracts awards by the immediate past civilian administration which ended on may 29,2007. At the federal executive council on may 16, 2007,the former president announced the award of contracts worth 176 billion naira {$1,375,000,000 },just 13 days away from quitting office.
He further noted that the way some new power and fertilizer plants were funded also fuelled suspicion that the Crude Account component of the reserves was being depleted. Former finance minister who was also a vice president at the world bank before her appointment as a minister in Nigeria, had to alert the Nation that the reserves were about to be depleted by many sponsored frivolous contract papers awaiting the president’s signature.
Also, the Nigerian Revenue Mobilization Allocation and Fiscal Commission {RMAFC] had once criticized the central bank governor Prof. Soludo for lack of transparency in handling the Nigerian’s Federation account. The commission specifically alleged that the Central bank connived with some federal agencies to underpay the federation account to the tune of 16 billion naira {$125,000,000} by paying the amount to the excess crude account.
Nwakego Eyisi (2011) observed that the Nigerian government has spent billions of dollars since 2008 to maintain an exchange rate of 150 naira to the dollar. The nation’s foreign reserve which was at least $60 billon in 2008 is $34 billion today so tens of billions of dollars has gone into propping up a depreciating Naira.
It is argued in the analyses of economists that a nation with mismanaged external reserve will witness such crises as retrogressive growth and development, excessive external debts, weakness in foreign exchange, upsurge poverty, rising mass unemployment, millions of workers will be struggling to have access to basic amenities, low level of living standards of the people among others. In this case, to avoid a situation like these, Nigeria need to effectively managed and utilized its external reserve.
Abubakar Jimoh; [email protected]
