Lately, the Central Bank of Nigeria in a two-page Press Release, laboured to corroborate the Finance Ministry's earlier clarifications on "the meaning, structure and management of the nation's foreign reserves".

CBN defines external reserves, appropriately, as external assets held in foreign currencies by a country's Central Bank for the “primary purpose of safeguarding the international value of the legal tender currency (i.e. the naira)”.  

In an earlier article titled "ECONOMY & RESERVES: BETWEEN THE TRUTH AND GOVERNMENT CLARIFICATIONS" we discussed the Finance Minister’s tripartite classification of our external reserves into Federation, Federal Government and CBN Reserves.  We observed that the accumulation of the component of federation reserves otherwise known as Excess Crude Account (ECA) remains unconstitutional until enactment of the relevant bill!  The National Assembly's acquiescence to this illegality may be seen by critics as indication of conscious complicity in constitutional violation with shared culpability in deliberate economic mismanagement.  

It is mischievous to have accumulated over $10bn ‘surplus’ crude revenue by January 2013, while government borrowed over N1 trillion, with oppressive costs to supplement deliberately understated revenue projections in 2012 budget.

In contrast to the declared objective  “of safeguarding the legal tender of the nation's currency,” the process of consolidating CBN's rising reserves inevitably pitches humongous naira 'tsunami' against relatively austere bi-weekly forex auctions by CBN.  The resultant huge imbalance in favour of the dollar remains a constant threat to naira exchange rate and price stability.

Paradoxically, the accumulation of CBN’s lion share of about $32bn out of Nigeria’s total external reserves of about $45bn has instigated adverse ripples on interest, inflation, and exchange rates and ultimately also,  on fuel subsidy.  Consequently, in reality, increasing CBN reserves actually translate into deepening poverty nationwide.

Furthermore, CBN’s core mandate of price stability is similarly adversely impacted by its management of external reserves in line with the three declared objectives of stability of principal sum, adequate liquidity and maximization of return on principal.  In reality, possibly over 80% of Nigeria’s total reserves are held as convertible US dollars; consequently, it follows that since the American currency has lost over 25% of its value in the last decade or so against the euro, Nigeria’s average reserve base of $40bn  would have also depleted by about $8bn in the same period!  Thus, CBN’s management strategy may have inadvertently, also, failed to protect the principal sum as envisaged.  

Any claim of success in achieving the second objective of maintaining adequate forex liquidity “to safeguard the international value of the naira” is equally contentious; for example, in 1996, when naira was N80=$1, with Nigeria's total reserves of $4bn projected to cover imports for just four months; inexplicably, however, in spite of exceptional dollar liquidity, the naira rate fell to over N120=$1, with $60bn reserves and over 30 months imports cover in 2006!  Similarly, Nigeria’s current total external reserves of over $45bn also poses a threat to the value of the naira!  

Additionally, achievement of CBN's third objective of maximization of returns in the management of our reserves appears equally controversial in the light of actual reality;  it is inexplicable that government pays up to 7% interest on foreign borrowings such as the $500m Eurobonds, while CBN would be challenged to report a 4% yield on Nigeria’s external reserves domiciled with the same international merchant bankers, who incidentally, also midwife our more expensive external loans!

In conclusion, let us examine CBN’S justification of the process by which it consolidates its lion share of reserves!  

The following is an excerpt from CBN’s Press Release in this regard "…when the monthly Federation Accounts Allocation Committee (FAAC) has decided on the distribution amongst the three tiers of government, the foreign currency is then SURRENDERED to the CBN, which MONETIZES this amount into naira for the accounts of the respective tiers of government. 

Let us comment on two key words; i.e. ‘surrender’ and ‘monetize’ in above passage.  Firstly, the FAAC, as a mere allocation committee is not constitutionally empowered to surrender public sector dollar revenue to anyone!  In fact, Section 162 of the Constitution does not distinguish the currency denomination of distributable revenue.  It is patently mischievous and a deliberate misrepresentation of the constitution for CBN to claim to derive the rights to acquire federation dollars from FAAC!! 

The word ‘monetize’ is an exotic euphemism for the economically poisoning process in which CBN prints/creates naira balances as substitution for distributable dollar revenue; the adverse impact of this process instigates high lending cost, inflation, increasing debt accumulation and a weak currency; ultimately also, the weaker the naira, the higher will be fuel prices and related subsidies!

This obtuse process of N/$ exchange rate determination is regrettably, not market determined, but is rather consciously contrived in favour of the dollar by CBN’s unholy monopoly of the forex  market. 

With reference to its ownership of $32bn reserves, the CBN’s Press Release vainly concludes that, "it is erroneous to expect that the CBN should make available this same portion of the reserves again for expenditure after it has been spent when it was monetized to naira."   

Ultimately, however, since a slave’s wealth belongs to his master, CBN may have successfully achieved the impossible feat of eating your cake and having it!  Sadly, Nigerians are the unknowing victims of this sleight of hand!