Mustafa Chike-Obi, former chairman of Fidelity Bank, says maintaining Nigeria’s $52 billion to $53 billion foreign reserves costs the country more than $10 billion annually.
Chike-Obi spoke on Thursday during an episode of Policy
Without Politics, a podcast he host with Ken Ikpe.
He said the reserves earn an average return of 3 percent
from liquid assets held abroad, while the naira used to fund them costs 20
percent.
“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.
“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 the cost of holding reserves must be weighed against
their benefits, arguing that a larger stock does not automatically mean Nigeria
is better off.
“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,” Chike-Obi said.
He said the assets were held in liquid instruments at
institutions abroad, including branches of Nigerian banks and JP Morgan.
“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.
Chike-Obi said investments that could not be readily
accessed 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 added.
Chike-Obi identified meeting foreign obligations when they
fall due and reassuring trading partners and lenders that Nigeria can pay for
imported goods as the two main reasons for holding reserves.
“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.
Chike-Obi said he did not know the precise level of reserves
Nigeria needed but believed it was well below $52 billion.
He added that the amount needed would depend partly on how
reliant Nigeria was on imports.
“And the more foreign good dependent you are, obviously the
larger your reserves should be,” the investment expert said.
Nigeria’s foreign reserves stood at $55.09 billion on
October 14, after rising from $51.94 billion on July 28, according to Central
Bank of Nigeria (CBN) data.
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