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The content of Nigeria’s foreign exchange reserves

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On Monday 20 March 2018, The Guardian Newspapers published an article by Contributor Feyi Fawehinmi titled, “What’s Inside Nigeria’s Foreign Exchange Reserves”. In this article, the writer describes and discusses his perceived rationales for the increase in the country’s Foreign Exchange (FX) reserves. Familiar with the writers mindset on such matters as they have been fairly widely canvassed lately one was inclined to ignore but we all have a shared responsibility to ensure that Nigerians are well informed particularly knowing the penchant of compatriots to latch on and celebrate such rabble rousing writings with radical bent, it behoves all concerned with a better representative perspectives to stand up to be counted by sharing such views for better enlightenment of all. We must not and cannot dismiss Mr. Fawehinmi’s brilliance in using half-truths, veiled innuendos, and outright misinformation to convince fair-minded and well-meaning Nigerians that he knows what he is talking about. That is the reason why a response is imperative for as Edmund Burke once observed, “The only thing necessary for evil to thrive is for good men to do nothing”.

Before we outline the real reasons for the rise in Nigeria’s FX Reserves, let us first highlight why Mr. Fawehinmi’s writing contains many misleading explanations.

First, although he correctly explains how proceeds from the Federal Government’s Eurobond issuances could help boost our FX Reserves, he ominously omits the fact that it is from the same FX Reserves that the CBN supplies FX to the market throughout the year. This is a significant omission. While it is true that the CBN has received US$7.3 billion worth of Eurobond issuances since February 2017, we are aware that the Bank has also supplied US$24.3 billion to the FX Market over the same period. This amount includes sales in the interbank spot market, FX supplies for invisibles/services, clearing of maturing forward positions, weekly sales to Bureau De Changes (BDCs), and sales to small end-users for travel allowances, medical bills, schools fees, and the like. How then can someone’s savings account grow if he receives US$7.3 billion but spends US$24.3 billion?

Second, the attribution of swaps by Nigerian Banks as accountable for the growth in our FX reserves ignores the fact that swaps are part of the FX Reserves of all Central Bank, and therefore Central Bank of Nigeria cannot bulk this reality even when the Reserves were as high as US$23 billion in October 2016. Therefore, the notion that it is a new phenomenon is incorrect and the subtle chastisement of Nigerian banks for engaging in swaps reveals the author’s lack of requisite knowledge of this generally-acceptable worldwide banking practice. It is also curious to note that his computation of the size of swaps by Nigerian banks is higher than what has been published by the International Monetary Fund (IMF), as contained in their latest report on Nigeria, which was published few days ago. Is it rational to expect that the writer has better information on CBN swaps than the IMF?

Third, and in usual confused manner, the author suggests that all the FX inflows into the Investors and Exporters (I & E) Window go into the Reserves. Contrary to this, we are aware that the I & E window operates as a free “willing buyer, willing seller” market, which explains why its operational exchange rate (about N360/US$1) is higher than those of other segments. A significant portion of the inflows into this market do not get to the CBN because they are bought by willing importers who operate in that market. The CBN operates in that market as a “residual” participant: buying excesses and supplying shortfalls, as the case may be. It is therefore not correct to ascribe the total inflows into this market to the country’s FX Reserves.

So, what is really inside Nigeria’s Foreign Exchange Reserves? We are aware that there are three main reasons for the sustained rise in the Reserves. Perhaps, the most significant one has been the sharp decline in the country’s import bill, as a direct result of the June 2015 CBN’s policy to restrict FX access to items which could be produced locally: the so-called “41-items policy”. Despite the initial pushbacks against this policy, it has no doubt heralded significant benefits for the country. Aside from the rebound in local production of affected products and associated boost in employment generation, it has been reported that the country’s monthly import bill fell from an average of about US$5.5 billion in 2014 to US$3.58 in 2015, and about US$2.3 billion in 2017. A linear approximation would imply that the country’s FX Reserves have saved about US$38.35 billion if we use the 2014 import bill or US$15.33 billion if you use the 2015 import bill.

The second reason for the rise in our FX Reserves is simply due to the gradual, albeit persistent, recovery in oil prices. From a low of US$45.5 per barrel as of 23 June 2017, the price of Bonny Light Crude Oil has risen to US$69.6 per barrel as at 21 March 2018. To the extent that Nigeria’s daily oil production has remained stable, one does not have to be a brain surgeon to calculate how much more FX inflows our country’s FX Reserves have enjoyed over this period.

The third reason for the improved fortunes on our FX Reserves is truly attributable to the I & E window. Recall the explanation above that the CBN is a residual participant in the market. Given that the amount of inflows in that window have frankly exceeded many people’s expectations and willing buyers have been unable to pick up all the supply, the CBN has bought more dollars in that segment than it has sold. So the Bank’s participation in that market has been a net positive to the FX Reserves.

We do understand the penchant for cynicism about reported progress in any and every sphere of our national life but that does not mean that real progress is not being made, however few and far between. For example, Mr. Fawehinmi dismisses the notion that significantly higher FX Reserves should be highlighted as an accomplishment. Yet, it is not an easy feat, because the higher they are, the more tools and flexibility a Central is able to deploy in times of need. This is analogous to basically having more saving in your bank account which overall should positively impact the country’s credit rating. It is also a matter for the records that the Governor was called all manner of unprintable names during the period of cascading rate of exchange. it is only fair and should be expected that he receives all the plundits as we experience a rebound.

So, while concerned particularly with the benefit of hindsight applaud the CBN for putting in place policies like those on “41-items” and the “I & E” window, which have helped stabilize the exchange rate, improve FX supply, create jobs, and boost economic activities, those with inadequate knowledge should avoid throwing shades on such laudable achievements.


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