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Explainer: Nigeria’s external reserves invested or idle?

External reserves drop by 6.76% in one month on debt payments

Nigeria’s external reserves have maintained a steady decrease, declining to $38.07 billion as of October 7, 2022, data obtained from the Central Bank of Nigeria (CBN) show.

What are external reserves?

External reserves, also known as foreign exchange reserves, according to the CBN, are assets held on reserve by a monetary authority in foreign currencies. These reserves are used to back liabilities and influence monetary policy. They include foreign banknotes, deposits, bonds, Treasury bills and other foreign government securities. These assets serve many purposes but are most significantly held to ensure that a government or its agency has backup funds if their national currency rapidly devalues. Foreign exchange reserves are also called international reserves.

“International reserves (or reserve assets in the balance of payments) are those external assets that are readily available to and controlled by a country’s monetary authorities. They comprise foreign currencies, other assets denominated in foreign currencies, gold reserves, special drawing rights and IMF reserve positions. These reserves may be used for direct financing of international payments imbalances or for indirect regulation of the magnitude of such imbalances via intervention in foreign exchange markets in order to affect the exchange rate of the country’s currency,” the International Monetary Fund said.

Are external reserves idle or invested?

“Nigeria’s foreign exchange reserves are not kept idle. They are invested in very liquid, secured assets that are easily convertible to cash,” said Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited.

It could be invested in short-term interest-yielding Treasury bills and bonds, among other instruments, he said.

Tope Fasua, CEO of Global Analytics, said: “Subject to the CBN Act, they can always rebalance the portfolio. There are some risky products like derivatives they cannot invest in, probably also things like cryptocurrencies. But they can buy US Treasuries and also such sovereign bonds of many countries. They have also been known to try and diversify some of the funds to other major currencies like the Chinese yuan.”

What are the compositions of the external reserves?

Total external reserves as of first quarter 2022 stood at $39.28 billion, of which Special Drawing Right (SDR) was $6.58 billion, claims in US dollars was $28.18 billion, claims in euros 195.08 million, pound sterling $245.29 million, Japanese yen $4.57 million, Swiss Francs 0.00, in other currencies $0.81 million, and Chinese yuan (renminbi) $4.07 billion.

Read also: IMF slashes Nigeria’s growth forecast to 3.2%

Composition of external reserves

The CBN Act of 2007 provides that the central bank shall maintain a reserve of external assets consisting of all or any of the following: gold coin or bullion; balance at banks outside Nigeria where the currency is freely convertible and in such currency, notes, coins, money at call and any bill of exchange bearing at least two valid and authorised signatures and having maturity not exceeding 90 days, exclusive of days of grace; and Treasury bills having a maturity not exceeding one year issued by the government of any country outside Nigeria whose currency is freely convertible.

Others are securities of, or guarantees by, a government of any country outside Nigeria whose currency is freely convertible provided such securities shall mature in a period not exceeding 10 years from the date of acquisition and are of such investment grade as may be determined by the board from time to time; securities of, or guarantees by international financial institutions, if such securities are expressed in currency freely convertible, and in the form of investment grade assets as may be determined by the board and maturity of the securities shall not exceed five years.

It also includes Nigeria’s gold tranche in the IMF, allocation of Special Drawing Rights (SDR) made to Nigeria by the IMF, investment by way of loans or debenture in an investment bank or development financial institutions within or outside Nigeria for a maximum period of five years. Insofar as the amount invested is not more than 5 percent of the total reserves, the reserve level at the time can sustain 24 months of import, and the loan or debenture is in foreign currency.

Ownership structure of external reserves

Nigeria’s external reserves by virtue of statute are segregated into three distinctive portions, namely the CBN, the Federal Government of Nigeria and federation, reflecting ownership of the reserves.