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External reserves fall below threshold


Godwin Emefiele of CBN. Photo: NAIRAMETRICS

• ‘We can’t get firmer naira with dithering external reserves’
• Nigeria lags behind South Africa, Algeria in size, per capita

Nigeria may be leaning against the wind as its foreign exchange reserves fall below the threshold required by the Central Bank of Nigeria (CBN) Act of 2007, as data analysed by The Guardian suggests.


The reserves, which currently stand at $36.6 billion (N13.9 trillion), cannot fund a two-year import as required by the Act.

The Act, which charges the CBN with the responsibility of managing the country’s reserves, says, “the reserves level at the time can sustain 24 months of imports” in addition to general guidelines on its investment decision.

External reserves management is, according to the Act, guided by core objectives, such as providing “a level of confidence to markets that a country can meet its external obligations,” hedging the domestic currency, limiting “external vulnerability” and providing adequate liquidity to finance day-to-day official transactions and unforeseen needs.

The regulatory framework, perhaps, in recognition of the important role of the reserves in sustaining interdependent national economies, also directs that not more than five per cent of the total reserves be invested in “freely convertible” foreign securities and assets.


It stipulates that its size at any material time should be equivalent or exceed the value of the two-year imports of the country. But statistics have shown that the external reserves in recent times come short of this provision.

LAST year, Nigeria’s import bills totaled N16.96 trillion, which is N3.06 trillion above the naira equivalent of the current reserves. The differential shows that the 12-month import is 20 percent higher than what the current reserves can conveniently fund.

The combined value of 2018 and 2019 imports gives a conservative estimate of what the Act implies by a 24-month import equivalent even though the law might have assumed a futuristic view plus the fact that the country’s import rate has grown by close to 100 per cent in the past four years. Yet, the reserve cannot finance 45 per cent of the N30.13 trillion frittered away on the consumption of foreign goods.

Bode Ashogbon, an economist and investment consultant, said Nigeria must, as a matter of necessity, expand its economic base and export earnings to boost its external reserves.


He noted that, even if the 24-month important equivalent requirement was a mere guide, the government must see the accumulation of strong external reserves as part of tactical efforts to strengthen the naira. He added that there was a direct relationship between the “size of reserves and strength of the local currency.”

HOWEVER, a former Director-General at the West African Institute for Financial and Economic Management, Prof. Akpan Ekpo, said Nigeria would not experience serious shock because the reserves could not finance a 24-month import. Reserves sufficient to clear six-month import value, according to him, are good enough.

He told The Guardian that the 24-month import value equivalent requirement might have contemplated “a time frame within which the economy would industrialise” which might not apply in Nigeria’s case.

Ken Ife, a professor of Economics, said the Economic Community of West African States’ (ECOWAS) monetary convergence stipulates three-month import equivalent reserves, and that, with Nigeria achieving six to nine-month import value, it had surpassed the regional recommendation.

Nigeria’s external reserves have lost about a quarter of value from 2009 to date. In contrast, yearly import has grown by over 230 percent between 2009 and 2019.


NIGERIA is not alone in foreign reserves targeting. Every country creatively manages its external reserves to promote a healthy liquidity position. South Africa, Kenya, and Ghana, countries in a similar trade and monetary jacket with Nigeria, for instance, also tie their reserves to import values.

Pairwise, South Africa’s reserve is over 44 percent larger than that of Nigeria. The gap is much wider when the figures are weighed against the volume of import and population of the respective countries. For instance, Nigeria’s external reserve per capita is less than $200 while that of South Africa is $898.3.

The reserves of other oil-producing countries such as Saudi Arabia, the United Arab Emirates, Iran, Iraq and Algeria dwarf that of Nigeria in terms of face value and per capita. The country comes 50th on the global ranking that is now led by China’s astonishing $3.3 trillion.

The International Monetary Fund (IMF), whose major role from inception, was to support countries facing temporary shocks in their balance of payments, stipulates transparent, accountable and responsive reserves management.


“The broad objectives of reserves management should be clearly defined, publicly disclosed, and the key elements of the adopted policy explained,” states IMF.

IN the case of Nigeria, there seems to have been a disclosure issue about management. Whereas the law specifies how and what could be invested from the reserves, the apex bank rarely gives information beyond the accumulation within a defined period of time.

What portion of the reserves has been invested? Are there returns on such investments? These are among the hanging questions.

The apex bank was yet to respond to The Guardian inquiry, delivered through messaging channels yesterday, seeking clarifications and specific information on the foreign reserves.


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