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If there was any area where the government of erstwhile President Olusegun Obasanjo scored a major political point in its chequered eight years rule in Nigeria, it is unarguably in the foreign reserve buildup.

Like a man who knew where he was going and what he wanted to achieve at his destination, that government was adept in the act of pumping up the foreign reserves of the country to give all the impression that all was well.

That was because for several years before its coming, Nigeria scarcely had a reserve enough to guarantee more than two months of import, coupled with her staggering external debt portfolio that made everybody look like a slave before the international business community.
Owing to this high level of indebtedness, not many countries wanted to enter into normal economic transactions with the Nigerian authorities or her businessmen.

It was not surprising therefore that the Obasanjo administration at inception, identified external reserve buildup as one cardinal economic objective that could restore international confidence and credibility to government.

The abysmal degradation of Nigeria’s external reserves prior to the inauguration of the last administration could be said to have been the heritage from profligate military government, that wasted so much of the nation’s resources, servicing the huge stock of Nigeria’s foreign debts, even when they knew very little about foreign debt management.

However, while it was on record that the nation witnessed an unprecedented boom in her foreign revenue inflow, the major debate throughout the period was how to manage such assets to the benefit of the citizens of the country. Surprisingly, much of the brouhaha, particularly among the three tiers of government, was how to share the receipts from oil exports, which indeed contributed significantly to the buildup.

The argument had been how the country would be accumulating huge foreign reserves while its citizens were languishing in abject poverty. Although many believe that the former president must have used that variable to boost his political credentials, which he often flaunted while in office, others have argued that the way he handled the issue, and the controversy surrounding its politics had indeed enriched the literature of external reserve management among Nigerians.

For instance, as at the time that President Obasanjo left office, Nigeria’s foreign reserves stood at over $45 billion, a development many felt was a great improvement from what he met in 1999, when he assumed office.

According to the Central Bank of Nigeria (CBN), this position would have been better, if not for some commitments entered into by the administration with respect to the settlement of the London and Paris Club of creditors.

But it could be argued that no discussion on the nation’s external reserve management profile can be meaningfully concluded without recourse to crude oil sale which accounts for over 90 percent of the exports, and about 25 percent of her Gross Domestic Product (GDP).

Available records also show that crude oil sale accounts for over 80 percent of Nigeria’s public revenue. This implies that Nigeria’s external reserve management policy faces a bleak future any day current trends in oil revenues change dramatically, considering that successive administrations have failed to heed the call for Nigeria to diversify her sources of foreign currency inflows.

This is more worrisome when it is considered that the nation’s non-oil sector, including tourism, entertainment and education have suffered stunted growth over the years.
As the sixth largest oil producer in the world, Nigeria exports about 2.3million barrels daily and Obasanjo’s eight-year reign witnessed a consistent rise in oil prices.

This also implies that Nigeria’s heavy reliance on oil receipts for income generation might take a dangerous toll on the economy if there were any adverse developments in international oil prices.
It must be admitted that Nigeria’s foreign reserve status received a big boost in the last eight years, owing to the robust oil prices and strong economic fundamentals, against which background some observers have argued that there was need for the nation to devise a means of investing a portion of the savings in growth enhancing activities.

But to achieve this objective, government would require a comprehensive review of the country’s revenue sharing formula among the federating units.

But there are fears that despite her massive external reserves buildup, the leadership has not been able to develop appropriate macroeconomic policies to protect the country in case of future falls in oil revenue.

Equally disturbing is the fact that there has been no concrete strategy to build adequate capacity for active reserve management. One of the ways that Nigeria can enhance its external reserve programme to benefit her people, experts have argued, would include a strategy of building effective national institutions to link development projects with medium to long-term plans in addition to the pursuit of economic liberalization.

More importantly, the various strategies for diversification of the nation’s foreign earnings can no longer be treated with levity, given some of the shocking experiences of several governments in the past, following some unexpected volatilities in international oil prices that could not allow them meet the targets for particular years.

This has been so because most people have taken oil windfall as a permanent phenomenon rather than a temporary development that may be sustained.

This thinking among Nigerians and government has resulted in a situation where some have refused to curtail expenditure when the situation was no longer clement.
Foreign reserves management
However, in its commitment to widening the opportunities accruable to Nigerians from the external reserves management, the CBN in 2006 appointed 14 banks to partner other international asset managers to manage the nation’s external reserves. This new stance, the apex bank reasoned, would ensure that Nigerian banks would no longer be bystanders, but active players in the management of the nation’s external reserves.

The CBN’s desire in involving the home banks in the management of the nation’s foreign assets is to help them grow professionalism in the art of reserve management.
They are expected to build capacity in human resources as a means of propelling them into global financial markets, which will also create opportunity for Nigerians to learn the financial trends in the international environment.

To ensure that the task was taken seriously by the home banks, the CBN boss, Chukwuma Soludo, promised that financial institutions that were able to muster $1billion as capital base would be given the opportunity to manage, at least, $500million of the nation’s external reserves, although observers say they are yet to see how much the banks have been given to manage since their appointment.

The 14 global asset managers and their local counterparts were: Black Rock and Union Bank of Nigeria Plc; J.P. Morgan Chase and Zenith Bank Plc; H.S.B.C and First Bank of Nigeria Plc; BNP Paribas and Intercontinental Bank Plc; UBS and United Bank for Africa Plc; Credit Suisse and IBTC Chartered Bank Plc; Morgan Stanley and Guaranty Trust Bank Plc; Fortis and Bank PHB Plc; Investec and Fidelity Bank Plc; ABN Amro and Access Bank Plc; Cominvest and Oceanic Bank Plc; ING and Ecobank Plc; Bank of New York and Stanbic Bank Plc and Crown Agents and Diamond Bank Plc.

The CBN then said it would give each asset manager, about $500m of the external reserves to manage. The apex bank also made good its pledge of July 6, 2004 to reward the first bank to consolidate and the one with the largest number of merging banks, as it made a deposit placement of $50m each in United Bank for Africa Plc and Unity Bank Plc.

The decision to entrust such portion of the reserves to the 14 global asset managers and Nigerian banks out of the 17 that applied was reached at a meeting of Investment Committee of the CBN. The three other foreign institutions, namely: Barclays Bank (DCO), Deutsche Bank AG and Pacific Investment Management Company (PIMCO) were technically qualified but could not be awarded mandates because they did not have local partners.

The CBN has traditionally kept the external reserves as deposits with foreign banks. This is the first time that it was appointing foreign assets managers to manage part of its reserves, along with local banks in line with global best practice.

As a first step, the Investment Committee decided to award mandates for $7bn out of the CBN portion of the total external reserves. The $7 billion was awarded to 14 out of 17 reputable Global asset managers which not only met the CBN’s requirements, for appointment as external assets managers, but also for partnership ties with Nigerian banks.

Falling dollar value
There are fears that the tumbling fortunes of the US dollar would spell doom for Nigeria’s external reserves considering that the bulk of it are kept in that currency.
At almost $60billion by recent statistics from the CBN, the falling value of the dollar compared to other international convertible currencies would mean a major depreciation in the overall value of Nigeria’s total holding.

This would also reduce the cover it could give to the nation’s imports of goods and services as well as its rating before the international community.
External reserves for such category would be seen as money to be spent immediately to meet growing demand for domestic and imported goods and services.

The broad objectives of external reserve management, according to Sheriffdeen Tella of the Department of Economics, Olabisi Onabanjo University, Ago Iwoye, include among others the desire to meet temporary imbalances in the external payment required to be met by her and to intervene in the foreign exchange market in order to stabilize the exchange rate.

The need to settle financial obligations arising from international trade as well as to finance foreign contractual agreements and other important regional or multilateral group levies and dues remained a critical issue in the nation’s foreign reserve management.

Over the last few years, the management of Nigerian’s external reserves focused largely on providing liquidity that can be spent or exchanged in the settlement of transactions with the rest of the world.
This role becomes more imperative considering the nation’s status as a net importer of foreign goods and services to meet domestic needs.

Part of this policy has been that which seeks to ensure adequate funding of the foreign exchange market with a view to achieving a stable exchange rate necessary to build up confidence in the domestic currency.

The CBN also recognized the need to use the foreign reserve element to further enhance the nation’s credit worthiness, realizing that an enhanced level would serve as an indication to the international community that Nigeria’s economy has good prospects. It must be admitted that CBN’s ability to grow the reserve has helped the nation’s credit rating thereby increasing foreign direct investment especially during the Obasanjo years.

The reserve management strategy of the CBN, which is anchored on liquidity management and capital preservation, empowers it to hold the larger proportion of reserves in secure, liquid low yield assets, including foreign government bond and deposits with reputable international financial institutions.
For Nigeria, the principal instrument of choice for sovereign external reserves remains the United States (US) debt securities, including treasury bonds, bills and notes of varying maturity.

The US dollar has remained the preffererd currency for Nigeria’s foreign reserves, a strategy that has helped the country to meet the bulk of her international trade obligations usually denominated in dollar, Euro and the Japanese Yen.

These instruments are backed by full faith and credit of the US government, and, therefore, command a high rating and remain relatively liquid.
But besides the above and the IMF tranche, gold is another major reserve given its relative stability and inherent store of value, just as other international convertible currencies also feature in Nigeria’s reserve portfolio.

Huge reserve portfolio in the midst of extreme poverty
Debate over Nigeria’s continued accumulation of foreign reserves against the backdrop of so much poverty in the land has been on for some time now.

Since conventional thinking is that a country holds foreign reserves for precautionary, transactional and speculative purposes, some commentators have contended that the massive erosion of the nation’s infrastructure should be enough justification for her to deploy part of the resources to finance development and infrastructure in parts of the country.

Some have argued that taking a bit of the resources to finance strategic development projects would not diminish the wealth of the nation or the level of her reserves, which is regarded as a key indicator of the strength of her economy.

But overall, a good reserve portfolio for Nigeria should be able to enhance the monetary authority’s market intervention functions, thereby enabling Nigeria to use a target exchange rate as export promotion strategy.

Consequently, its accumulation would serve as a powerful macroeconomic mechanism for raising long-term growth rates.
Statistics from Nigeria’s monetary authorities, reveal that underpricing the exchange rate could make domestic assets cheaper in foreign currencies, which could be a major incentive for foreign investors to come to the country

This explains why Nigeria recorded a huge foreign direct inflow during the eight years of the Obasanjo administration.
But many Nigerians have posited that instead of accumulating the huge foreign reserves, the country should have utilized part of it to feed its citizens at home. Mr Njide Ukadike, an investment analyst, said that part of the reserves should have been utilized to hedge against hunger in the land.

According to him, “even though the reserves are meant to strengthen the value of the naira, hedge against inflation and ensure a healthy balance of payment position, the welfare of the people should be paramount to the government. Just like the government utilized part of the reserves to offset part of the country’s debt, nothing stops it from taking some to improve infrastructure, repair the roads, and improve on agricultural production” adding, “it is like Nigeria is in a hurry to please its external creditors.”

The raging debate on the appropriateness of maintaining a huge foreign reserve deposit came to the fore recently, when President of Nigeria Bar Association, Mr. Olisa Agbakoba, lamented the level of poverty in the society, blaming the government for keeping a fat foreign reserve, in the midst of massive poverty among the citizens.

Also at the peak of the debate on the relevance of a huge foreign reserve several former governors, including the immediate past governor of Lagos State, Asiwaju Bola Ahmed Tinubu, have queried the rationale for keeping huge foreign reserves, while the people are suffering.

It was in the light of these realities that some have canvassed that a portion of the reserves be repatriated to Nigeria to fund small and medium-scale enterprises and infrastructure development projects that could enhance the living standard of the people and would directly impact on the well being of Nigerians.

Similarly, Prof. Chukwuma Soludo was not spared the barrage of questions over the wisdom of keeping fat foreign reserve.

He told Daily Sun that this was the question he was being confronted with every time he met with some Nigerians.
Said he: “People often wonder why we have to keep billions of dollars abroad instead of bringing it here and sharing it among the three tiers of government, while others believe it was useless for us to keep such huge reserves, when our per capita income in Nigeria is low.

“But my answer has always been that China has a per capita income that is a fraction of the per capita income in US and in Europe. China is still by and large a very poor country on per capita basis. But it has almost $1 trillion in foreign reserves and it is still growing”

According to the CBN governor, there are two components to Nigeria’s external reserves, which include the undistributed excess crude which is anything in excess of benchmark price for crude export. This excess is saved as the excess crude component and there is the naira component, which has already been spent within the economy.

The excess crude component part of the foreign reserve is that part that the country earned, saying “but we have not distributed and it is the smaller portion of the total reserves.” Over $20 billion of the reserves, according to Soludo, belongs to CBN, which comes from foreign currencies that have already been spent from the federation account.

For instance, he said, “Nigeria exports crude oil and earns dollars, and it is shared out from the federation account. The same dollars are brought to CBN that has the authority to issue legal tender, then it credits your account with the naira equivalent and from that moment you cease to claim ownership of the hard currency, because the naira equivalent has already been given to you.
“Therefore, if you need dollar again you have to bring naira to exchange for the dollar because you have spent your dollar in the past.

“Is it a magic that Naira has been very stable in the last three to four years and even appreciating for the first time since 1983. Is it a puzzle?”
He said part of the reasons for the steady appreciation of the Naira value was because the country has a reserve that enables her to supply enough foreign exchange to end users when need arises, and that has obeyed the simple law of demand and supply and it causes the upward movement of the Naira value.
“We give government Naira, after monetization in exchange for the dollar.

Those who patronize a Bureau De Change to exchange their money cannot go back to tell the mallam to return the hard currency since he has so much dollars. It does not follow logical reasoning, but demands that you should go back with the naira equivalent to collect additional units of the dollar.”

Bait for foreign investment
According to the CBN governor, “the level of foreign reserve is a major indicator of economic performance and confidence in the economy. Investors won’t come to you if they see the level of reserve is $200 million and you want them to invest in bonds and the stock market. Even if you tell him that he can take his money when he likes, he will ask what is the level of your reserve and you say $200 million, he won’t invest in such an economy, because he knows the day he demands his money he may not get it, so it is a measure of confidence in terms of stability and strength of the national economy. Every economy has a level of injection from this account that is healthy and anything higher than the optimal level will be wasted. There is an amount of money you can inject into the economy through investment in infrastructure like building power plants, roads and bridges and other capital projects that is effectively utilized, and anything above it will be put away, and it has multiple functions.”
On why Nigeria must save, the governor said it was because the oil sector is highly volatile, pointing out the boom of the 70’s and a government that thought it would continue to spend all it had, only to start borrowing following the great depression of 1978.

Dangerous not to save
“That was what we had gone through before, when the oil price crashed. In 1982, it ushered in the famous austerity measure. It was a response to the oil price crash and we had nothing to fall back on, we were spending as if the oil boom was going to be permanent and we never saved anything. So, when the bubble bust, we just had to crumble because we were left with bloated civil service, because we had employed many people and we were left with a lot of hundreds of abandoned projects, because we had embarked on massive capital projects, believing that the money would keep coming. And several of the abandoned projects are still littering the capital project landscape, projects started over 20 years ago.

Stable and strong Naira
Director of the Africa Department, International Monetary Fund (IMF), Mr. Abdoulaye Bio-Tchane, has, however, urged the Federal Government to define clearly its spending priorities and strengthen the management of public finances at the three tiers of government to yield better value for money from public spending. Bio-Tchane warned that higher oil prices, means that Nigeria and other oil-producing countries would have to deal with decline in real income, posing a challenge to developmental projects.
The weakening dollar has been a source of concern to many countries, particularly the oil-producing states whose revenue is in that currency, he said.

Bio-Tchane observed that the fall of the dollar would see a stronger naira, whereby people would spend less and the impact on inflation would be less. "The stronger naira will help keep inflation well within single digit level this year and into next year. Developments in domestic food prices, which depend on agricultural conditions including weather, are, however, a more important factor in determining inflation. As for economic growth, we do not expect a major impact from the stronger naira in the short term," he said.

Effect of huge foreign reserves
Chief Richard Akinjide, a former attorney general of the country said that in no circumstances could a weak Naira or an excessive foreign exchange reserve do the country any good at present. “A weak Naira could benefit us if we have goods and services to sell abroad but we have nothing to sell abroad except oil and gas, which are traded in US dollars. A large foreign reserve would help us if the future of our only trading commodities (oil and gas) was bleak.
“What government has done over the period is the contrary of what should have been done, if there had been a real desire to develop the Nigerian economy.

“In order to keep the Naira value stable with respect to the US dollar, while accumulating a large US dollar reserve, government has not only refrained from using the growing oil and gas money to invest, stimulate economic development and generate a much needed rise in purchasing power, it has also depressed domestic demand by increasing significantly tariffs on imported goods and weakening the Naira further, allowing it to fully absorb the international depreciation of the US dollar. Nigeria is working wholeheartedly for the United States of America.”

According to Akinjide, “I suggest an alternative independent currency policy. What we should have done is to spend a good proportion of the large, unproductive volume of the idle US dollars we have accumulated to do two things: To keep the naira stable. Not with respect to the US dollar but with respect to the strong currencies of this world such as the Euro. This would not have been a more difficult job than what we have achieved and that is to keep the Naira stable with respect to the US dollar.

“If we had done so, it is my best assessment that there would be today more economic activities, more employment, less inflation and the Naira would have aligned with the strong currencies of this world. It would have, indeed, appreciated to US$110 perhaps, to US$105. Keeping the Naira strong has been a repeated demand of enlightened Nigerians over the years. Some have even gone as far as suggesting that government should decree value for Naira as if this were feasible. In normal circumstances, it would take much time, money and efforts to make a strong Naira.

“When Nigerian foreign reserves began to accumulate, government should have allocated a billion US dollars or two to acquiring Euros. Government should have then opened a second competitive market supplied with Euros. A market similar to that where Naira is at present traded against US dollars.

The Nigerian foreign exchange demand would have then had the choice of buying either US dollars or Euros. It would also have had the choice of buying, either US dollars or Euros and vice-versa at world market prices. Even if it were US dollars that traders needed, they would have bought Euros. Why? Because they would have studied the market, observed the steady appreciation of the Euro and concluded there was the chance of a gain as Euros earlier bought could be later sold to buy more dollars and make a profit in Naira.”