RESERVES MANAGEMENT: SENSE AND NONSENSE 19062006

Nigeria’s buoyant and best ever external reserves portfolio, currently reported to be in excess of $30bn, would ordinarily be a welcome development in the face of serious deprivations of our people in the areas of health, education, mass transportation, employment, agriculture and internal security.  The reality on the ground, however, is that our people have become poorer today than at any other time in our history.  

The clamour and insistence of well-meaning Nigerians that the relatively huge reserves mean nothing if the lives of our people are not positively impacted upon have been rebuffed by the IMF-installed experts at the helm of our monetary policy.  These ‘wise’ men and women in the Ministry of Finance and CBN love Nigerians so much that they advise that we refrain from drawing down more of the reserves to ameliorate our poverty level!  Instead, they have warned that inflation would be unleashed on the economy and we would further pauperize our people if we were foolish enough to spend more of the reserves.   Rational Nigerians would consider this policy direction as a curious brand of economics which makes sense to public servants and major stakeholders in the banking system who are the main beneficiaries of this warped thinking.  

This official policy position and aversion to spending more of our dollar reserves is made more bizarre by this administration’s drive, through overseas trips and road shows, to attract external investors to the Nigerian economy, with the promise of double digit rates of return on their investments.  (Note that rates of return on investment in most of Europe and America remain generally below 7%).  It is not surprising that the volume of inflow of foreign direct investment into Nigeria has not matched our expectations.   The reason for this may not be farfetched: we should not forget that we now live in a global village and foreign investors must wonder why we are reluctant to invest our own bounteous foreign reserves in our own country if the expected rates of return are so attractive!  They must wonder why our government would still seek for external loans and investments with relatively higher costs than the interests which Nigeria earns on its $30bn or more idle reserve deposits in foreign banks!  

Indeed, the way things are, nothing stops international commercial buccaneers from borrowing cheaply (at about 3% interest rate) from custodians of Nigeria’s external reserves abroad and converting the naira sum into bank deposits or the purchase of treasury bills and bonds in Nigeria and earn more than 12% interest rates!  As one can imagine, such investment may be described as foreign direct investment, but in truth, add little value to our economy and our government may have unwittingly funded our own exploitation and become victims of an international financial scam!

There are indications that our monetary economic policy makers are overwhelmed by the unexpected windfall from the rapid upward movement of crude oil prices in the last 18 months or so.  They also appear to be bereft of positive ideas which could translate our best ever export earnings into a better life for the vast majority of our people.  In an attempt to beguile their failure, Nigerian banks with foreign affiliates have been invited to help manage Nigeria’s reserves!  Nigerians everywhere must be concerned at the implications and the benefits that would accrue from this arrangement; the CBN has not clearly indicated what precise benefits would accrue to the ordinary Nigerian in the end; for example, would the rate of return paid to the CBN by the Nigerian banks exceed the current rate of return paid by the existing conservators of Nigeria’s foreign reserves?  If so, why would the Nigerian banks knowingly pay higher returns to the federal government when they can borrow more cheaply from the international capital market; and if not, why must we shortchange ourselves for the sake of having Nigerian custodians for our reserves?  

Furthermore, what would stop the Nigerian banks from round tripping to Nigeria the reserves which are in their custody?  The collapse and demise of several industries and employment and income generating commercial houses at a time the banks have enjoyed unmitigated prosperity is a clear signal of a fundamental defect in our monetary and economic framework!  In other words, if the banks have become prosperous without adding much value to the economy, by the same token, the Nigerian economy may witness little or no growth from the participation of Nigerian banks in the management of our country’s foreign reserves! 

An honest evaluation of CBN’s reserve management adventure would reveal that it does not make sense that our huge reserves whether managed by Nigerian or foreign banks may never earn more than 5-6% rates of return, yet the same Nigerian monetary authorities gladly borrow at rates between 12-17% on their treasury bills and bonds sold in the money market.  It even becomes more frightening that the government is happy to pay such costs for money that is not used for any specific project or development, except for the nebulous purpose of sterilization of the excess naira caused by the monthly conversion of distributable dollar revenue and the deepening of the market for government securities, neither of which positively impacts on the welfare of those Nigerians who live on less than $1 a day!

The national wealth belongs to all of us and should be managed with a high level of accountability!  However, the placement by the CBN of up to $500m of the nation’s reserves in the custody of a Nigerian bank with a capital base of less than $200m without any equity interest or direct audit control or board representation smacks of irresponsibility!  Information provided to the media by Nigerian banks seeking affiliation with established international finance institutions to meet the precondition for participating in the bounty of reserves management clearly indicates that the arrangements envisaged are basically that of glorified correspondent banking with no direct liability on the affiliated international banks for the profits or loss or indeed for the day to day operations of the beneficiary Nigerian banks!  It all seems very odd!

If the CBN is truly serious about achieving better returns on our nation’s reserves abroad, they would be better advised to pay more attention to a diversification of the reserves portfolio which is currently almost exclusively kept as dollars!  The dollar rate has been known to fall by over 25% of its value against the euro in the last two years.  In this event, Nigerian’s reserves of over $30bn today could be worth much less without any direct benefit to our people as a result of dollar depreciation. Conversely, it is unlikely that the custodians of Nigeria’s reserves would be able to cover this value shortfall with rates of return which can hardly be expected to exceed 6-7% in line with international rates of return on such funds.  In the end, Nigerians would be the losers and the much touted reserves management scheme would have brought no comfort other than the enrichment of a favoured few!