Before the previous administration began to tout the country’s bloated foreign reserves as one of its major achievements, only a few Nigerians were familiar with the term ‘foreign reserves.’ In the last five years, the term has become so popular in public discourse that we are now used to hearing those with rudimentary knowledge of economics pontificating on the nature and purposes of foreign reserves. Yet, there is a clear misunderstanding of the concept, both in terms of its expediency and the justification of those who argue that it should be used to solve all or most of our socio-economic problems.
In addition to its function of improving a country’s credit-worthiness and wealth accumulation through careful management, the purpose of holding reserves is to give apex banks supplementary means to stabilise their currencies from excessive instability and to protect the monetary system from shock.
But the choice or a mix of the main options to which the reserves could be put – current consumption, accumulating them in the short to medium term, paying off foreign debts and setting up a fund for the future – depends on the peculiarities of the concerned economy and on the context of the country’s economic reform agenda.
No doubt, Nigerians have the right to demand for better standards of living through government’s expenditure on value-adding projects that will jump-start the economy, rather than starve the economy of the much-needed fund. However, there is a puzzle yet to be solved by many Nigerians as regards the monetisation of these reserves, which is the main cause of confusion. Unfortunately, only a few of those who have offered explanations on this matter have made some sense.
The controversy reached its peak during the ministerial screening, when the Minister of Finance, Dr. Shamsudeen Usman, then the Deputy Governor, Operations, of the Central Bank of Nigeria, tried to explain the ownership structure of foreign reserves and the reason why the whole reserves, which were then put at $43.6bn, could not be shared. But his bureau de change analogy, which ended with the fact that the only amount available in the Federation Account for distribution (which is the so-called excess crude) was $8.8bn, left many Nigerians more confused. In fact, it would have made the unlearned to think that the whole external reserve issue was a farce.
At a seminar for finance correspondents in Kwara State, the Deputy Director, Foreign Operations Department of the CBN, Mr. J.J. Aluko, had also tried to offer an explanation. He said the CBN reserves, which formed most of what was known as Nigeria’s foreign reserves, were foreign exchange inflows that had been monetised by the CBN and the naira equivalent released to the beneficiaries for their use. He added that once the foreign exchange inflow had been monetised and the naira equivalent released to the customer by the CBN, the foreign exchange no longer belonged to the customer but to the CBN.
According to him, “A greater portion of Nigeria’s external reserves, having been monetised, belongs to the CBN and is called the CBN reserves. This component of external reserves can only be available to an applicant (customer) whenever its equivalent amount in naira is provided by the customer. Federation Reserves represent the portion of external reserves that has not been monetised by the CBN.
“The naira value of such reserves are sterilised in various customer liability accounts and can only be released into the financial system upon receipts of mandates from the beneficiaries. Earnings called the ‘Excess Crude Oil Proceeds,’ which is the difference between the budgeted benchmark price and the actual market price of oil, belong to this component.” But his efforts, though better than Usman’s, did not solve the puzzle.
The Director, Foreign Operations Department, CBN, Dr. Muhammad Nda, had also explained that the excess oil revenue, above the budgeted benchmark price, was saved as a result of a ‘gentlemanly agreement’ among the three tiers. However, this gentlemanly agreement is unlikely to withstand the strains of the convulsions that the Senate’s move to scrap the excess crude account is likely to introduce into the relationship.
It said that the operation of the account, expected to rise to $11bn by the end of 2008, was one of the illegalities inherited from the Obasanjo administration, adding that the excess crude fund should rather be channelled into the Consolidated Revenue Fund of the federation. The June 18, 2008 edition of This Day quoted the Chairman of the Senate Committee on Media and Information, Senator Ayogu Eze, who confirmed the Senate’s determination to scrap the account, as saying that “Section 162 of the Nigerian Constitution provides that all revenues of the government must be pooled and put in the CRF and shared.”
We will, however, wait and see what becomes of the bill seeking to give legal backing to the operations of the account.
Nevertheless, fixing the budget benchmark well below the actual crude oil price, which enables the country to save, though good for the economy, is a double-edged sword. Is there an assurance that the saved funds, be it foreign reserves or excess crude proceeds, which keep accumulating as a result of favourable oil prices, will not end up boosting private purses? Is there also an assurance that when government succumbs and okays spending, the funds will not be channeled to abandoned projects? Or that they will not end up like the controversial power sector billions alleged to have disappeared into thin air?
Notwithstanding the present squabbles over whether the money should be spent, not spent or saved in a particular account, our leaders need to learn from the past. This is not the first time Nigeria will be experiencing an oil boom. Fluctuating oil prices had resulted in booms and busts in the periods 1974-1976, 1981-1983 and 1990-1991, but the booms were wasted as a result of the greed and corruption on the part of past leaders. And the bogus allocations to both the Executive and the Legislature in the 2008 budget, which are enough to power important projects, have not convinced me that the current leaders have been rid of greed.
Those whose positions may be considered as genuine are the ordinary Nigerians who naturally desire that everything works in the economy. But unfortunately, they have a say in how the country’s resources are spent but lack the power to influence implementation.
