Former Fidelity Bank chairman, Mustafa Chike-Obi, has questioned the economic benefits of Nigeria’s foreign reserves, arguing that maintaining reserves of between $52 billion and $53 billion could cost the country more than $10 billion annually.
Chike-Obi spoke on Thursday during an episode of Policy Without Politics, a podcast he hosts with Ken Ikpe.
He said the reserves generated an average return of about three per cent on liquid assets held abroad, while the naira used to finance them carried a cost of about 20 per cent.
According to him, the difference between the returns on foreign reserve assets and the cost of funding them creates a substantial financial burden for the country.
“So now you have an asset that’s yielding 3% at best today. But you are buying it with naira and you’re paying people 20 percent on the Naira. So for every dollar reserve you have, you are losing 17 percent a year if the Naira stays at the same nominal level,” Chike-Obi said.
He estimated that applying the 17 per cent difference to reserves of $52 billion to $53 billion would translate to an annual cost exceeding $10 billion.
“So the $52-$53 billion reserves today is costing Nigeria an average of 17 percent. If you multiply 17 percent by $52 billion, I think you get over $10 billion a year. That’s the cost of maintaining the reserves,” he said.
Chike-Obi argued that the benefits of holding foreign reserves should be weighed against their cost, warning against the assumption that a larger reserve position necessarily translates into improved economic conditions.
“My problem with the reserves is that Nigerians now feel the bigger the reserves, the better off Nigeria is. That statement is inaccurate because the dollars to be reserves have to be invested, have to be invested in liquid instruments that are held abroad,” he said.
He explained that the funds were held in liquid financial instruments at institutions abroad, including overseas branches of Nigerian banks and JPMorgan.
“Some of them are branches of Nigerian banks. So First Bank London has some. I know Zenit Bank London may have some. JP Morgan has some,” the former bank chairman said.
He added that investments that could not be readily converted into available funds did not qualify as foreign reserves, citing a 10-year South African bond as an example.
“If you bought a 10-year bond, for example, a South African bond, it will not count as reserves,” he said.
Why Nigeria needs foreign reserves
Chike-Obi identified meeting foreign obligations as they fall due and reassuring trading partners and lenders of Nigeria’s ability to pay for imports as the two principal reasons for maintaining foreign reserves.
He said the appropriate level of reserves should be determined by the country’s external payment obligations rather than by the pursuit of a higher headline figure.
“What that amount is needs to be managed. So bigger is not better. You need to get a schedule of your foreign obligations when they do and keep dollars that can match that,” he said.
Although he said he could not determine the precise level of reserves Nigeria needed, Chike-Obi maintained that the required amount was substantially below $52 billion.
He noted, however, that the appropriate reserve level would depend partly on the country’s reliance on imported goods.
“And the more foreign good dependent you are, obviously the larger your reserves should be,” the investment expert said.
Data from the Central Bank of Nigeria showed that the country’s foreign reserves stood at $55.09 billion on October 14, up from $51.94 billion on July 28.
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