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2007-2012: Movement in Foreign Reserves Account

10 Feb 2013

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Ngozi Okonjo Iweala, Finance Minister


The fuss over the management of the nation’s foreign reserves and excess crude savings between 2007 and 2012 is yet to simmer but financial experts say what should be uppermost is what the reserves were used for. According to them, efforts should also be made to discourage heavy dependence on importation which has continued to pose a serious threat to foreign exchange accretion, reports Festus Akanbi

The controversy triggered by the allegation made by former Minister of Education Obiageli Ezekwesili that the federal government has squandered about $67 billion in foreign reserves and excess crude savings left behind by the Obasanjo regime in 2007 is yet to subside. Ezekwesili, a chartered accountant and co-founder of Transparency International, was a key member of former President Olusegun Obasanjo’s think-thank. She served as Minister of Solid Minerals and later Minister of Education during the second term of President Obasanjo, a position she held until she became the Vice-President of the World Bank’s Africa Division.

It is this rich credential and the fact that Ezekwesili is not known to be flippant that explained the attention generated by her recent claim on the management of foreign reserves and excess crude account left behind in 2007. Interestingly, her claim came at a period Nigeria’s foreign exchange earnings from the sale of crude oil are on the rise. As at last week, the nation’s foreign exchange account peaked at $46.090 billion, according to the Central Bank of Nigeria’s records.

According to the International Monetary Fund (IMF), foreign reserves consist 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.”

Setting the Record Straight
In the past two weeks or thereabouts, the federal government officials have sought to put the record straight by dishing out data completely different from the ones bandied by the former World Bank vice president.

The federal government who spoke through the Minister for Information, Labaran Maku, explained that “At the end of May 2007, Nigeria’s gross reserves stood at $43.13 billion – comprising the CBN’s external reserves of $31.5 billion, $9.43 billion in the Excess Crude Account, and $2.18 billion in the federal government’s savings.

“These figures can be independently verified from the CBN’s records. The figure of $67 billion alleged in her statement is therefore clearly fictitious,” stated the Information Minister.

According to him, since President Obasanjo left office, the reserves have experienced fluctuations, rising from $43.13 billion in May 2007, peaking at $62 billion in September 2008 during the Yar’Adua/Jonathan administration when oil prices peaked at $147 per barrel, and falling subsequently to a low of $31.7 in September 2011.

The minister further explained that, “This fall in reserves was a result of the vicissitudes of the global financial crisis which caused CBN interventions in the currency market to defend the value of the naira. The excess crude savings, a component of the reserves, was also used to stimulate the economy at the height of the global financial crisis to the tune of about $1 billion (or 0.5 percent of our 2009 GDP).

The Debate
Economic analysts who were drawn into the debate said the controversy over the depletion of foreign exchange over a period of time was unnecessary as long as the economic managers are able to justify the deployment of the savings to necessary areas of the economy.

A financial expert, Odilim Enwegbara recalled that between June 2007 and December 2008, the account grew to $53 billion thanks to high oil prices. But because of global financial crisis in late 2008, global oil prices took a plunge to the extent that in 2009, the account went down to $42 billion, and continued on the downward curve in 2010 to $32 billion, which was caused by disruptions in oil production in the Niger Delta, as well as the inability of the global oil prices to recover to what it used to be before the global financial crisis. It stood at $32.6 billion in 2011, but then started rising even though sluggishly in 2012, climbing to $43.8billion in December, and to $45.3 billion late January 2013.

Managing Director Financial Derivatives Company Limited Mr. Bismarck Rewane told THISDAY that rather than engage in an unhealthy debate, the federal government should be able to convince its critics that the funds were not squandered as alleged but were effectively utilised. “The questions that should be asked is did we use the money to meet the yearnings of the people like the building of roads, power projects and so on?” Rewane asked, adding that the former minister who raised the allegation should also be prepared to explain what they did with the money accrued as foreign reserves and excess crude account while she was in the saddle.

Rewane explained that excess crude account is usually included in the external reserves account, adding that the excess crude is the naira equivalent of the dollar amount. He added that the external resources are made up of the federal government money and money that belong to individuals.

Foreign Reserves Movement-CBN Data
Information on the CBN website did not cover the period of 2007, which Ezekwesili alluded to, but a random study of the external reserve movement from 2012 displayed on the website showed a progressive appreciation in response with oil price movement at the international market.

For instance, the CBN data showed that on January 18, 2012, the nation’s external reserves was $33, 835 billion; on January 27 of the same year, it was $34,410 billion and rose significantly on January 28, 2013 to $45, 781 billion. Two days later, it appreciated to N45, 984 billion and moved to the threshold of $46,090 billion in January 2, 2013. And the latest figure of $46, 09 billion was recorded on February 4.
The position of the FDC’s boss tallied with that of Maku who explained that other uses of the reserves include “settling both public and private sector foreign currency obligations of Nigeria, including the importation of goods such as equipment for power sector.

Whenever a ministry or agency of government needs to incur approved expenditure in foreign currency (e.g. payment of goods and services, settlement of external debt, etc) it must provide the naira equivalent to the CBN before the Bank sells the required foreign currency”.

Rather than dissipate energy on the deployment of the reserves, economic watchers said Nigerians should put in place a system to discourage unhealthy importation, which is said to have constituted a major drain to the foreign exchange earnings.

Commenting on the implications of the rising appetite for imported goods, Enwegbara lamented a situation whereby rather than investing in the importation of items that can generate more jobs, Nigerians are neck-deep in the importation of all sorts of goods.

He said, “What would be the implications apart from the drain on our foreign reserves supposedly to be invested in importing machinery and industrial inputs; it has virtually destroyed our fragile manufacturing and agricultural economic sectors? It destroys our entrepreneurial spirit, as it destroys our small businesses.

“As more Nigerians are out of job or cannot find jobs as a result of foreign imports not only we lose the foreign exchange but we also lose the jobs. Therefore, as we become more and more import dependent, so also we are more and more creating jobs in those countries that export their goods to us.

“It is our fault, for not joining the WTO prematurely, but for continuing to remain in it even after discovering that it is completely an economic curse. Today, foreigners are not just exporting to Nigeria, they have set up retail shops, while some Asians have invaded our retail economy in such a way that these invaders now go door to door in our cities, our towns and even our remote villages selling directly to consumers and putting our small shop owners increasingly out of business. As mindboggling as it sounds it is happening before our very eyes.”     

When asked if the current impressive foreign reserves are capable of acting as buffer against shocks, Enwegbara said Nigeria has what it takes to sustain its trading activities for a period of 24 months.

According to analysts, the questions not asked so far are: what are the very sources of these foreign reserves? Are the reserves productive enough to justify keeping them? In other words, have their cost/benefits been fully studied and therefore accepted to be in the best interests of our nation?

Enweghara explained, “Let us not forget that out of our so-called ‘’impressive’’ reserves that by late January stood at $45.3 billion, $13 billion is hot money belonging to some foreign speculators, who could withdraw their money anytime they discover better arbitrage elsewhere in the world.

So, you can see why in the real sense, it is not all that as impressive as it is falsely displayed. Again, another fact is that there are some bonds that are about maturing and it is from our so-called ‘’impressive’’ reserves account those debts should offset.

“If we can’t ban hot money, shouldn’t we make its inflow-outflow be more to our national benefit than to the speculators, by making sure we close all the gaps that encourage them to take undue advantage of weakly structured stock market? That we should do, bearing in mind the devastating effects of the sudden plunge of the country’s stock market, if it happens when oil prices plummet should always destroy more than whatever gains made.

Tags: Business, Featured, Nigeria, Foreign Reserves

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