Nigeria’s external reserves have climbed to $53.31bn, but the growing foreign exchange buffer has sparked a debate over whether part of the funds can be deployed to address the country’s pressing security challenges.
The debate intensified after the minority caucus of the House of Representatives called on President Bola Tinubu to withdraw $5bn from the reserves for an “extraordinary national security intervention” in response to attacks in northern Nigeria.
However, despite the size of the reserves, experts say the funds are not ordinary government revenue that can simply be transferred to finance security, infrastructure or other public expenditure.
What the reserves mean
External reserves are foreign assets held by a country’s central bank to meet international obligations, support monetary policy and provide a buffer against economic shocks.
In Nigeria, the reserves are managed mainly by the Central Bank of Nigeria and comprise foreign currencies, securities and other external assets, including gold and special drawing rights.
The reserves are built from foreign exchange inflows such as crude oil and gas earnings, foreign investments, remittances and other exports.
For ordinary Nigerians, their importance is largely reflected in the stability of the naira and the country’s ability to meet international payment obligations.
The Director-General of the Centre for the Promotion of Private Enterprise, Muda Yusuf, said the primary purpose of the reserves was to strengthen the country’s currency position.
“The fundamental essence of external reserve is to support your currency,” Yusuf said.
He explained that a more stable exchange rate could improve the operating environment for businesses, encourage investment and ultimately support employment.
“For the ordinary people, if there is no investment, they will not find jobs,” the Director-General said.
Yusuf added that stronger reserves could also improve foreign exchange liquidity for importers and reduce uncertainty surrounding the cost of imported goods and services.
“if this helps to reduce excessive volatility in the naira, it can affect the prices Nigerians pay for imported goods and services,” he said.
He, however, noted that reserve accumulation alone did not guarantee cheaper goods because inflation, oil prices, capital flows, monetary policy and foreign exchange demand also influence prices.
When reserves fall
A country’s reserves decline when foreign exchange outflows exceed inflows, particularly during periods of weaker oil earnings, increased foreign exchange demand, debt repayments or sustained central bank intervention.
A prolonged decline can weaken confidence in the economy, limit the country’s capacity to meet external obligations and place pressure on the local currency.
It can also affect manufacturers and import-dependent businesses by making access to foreign exchange more difficult, while foreign investors may become concerned about repatriating their funds.
Yusuf said adequate reserves were particularly important during external shocks because they gave authorities room to respond to sudden changes in commodity prices, global financial conditions or investor sentiment.
“A country with a robust reserve position has more room to respond to sudden changes in global financial conditions, commodity prices or investor sentiment,” he said.
Why $53bn cannot simply be spent
The major distinction in the current debate is that external reserves are not equivalent to government revenue.
Although the reserves represent foreign assets belonging to the country, they are held and managed by the CBN primarily for monetary and external-sector purposes.
Consequently, the government cannot simply order the transfer of billions of dollars from the reserves to fund its expenditure without considering the legal framework, the CBN’s mandate and the potential impact on foreign exchange stability.
Yusuf also pointed to the composition of the reserves, noting that some foreign exchange inflows are connected to portfolio investments that investors may seek to withdraw.
“If you go and use the money, and the portfolio investors want to take out their money, how are you going to manage it?” he asked.
He warned that using reserve assets to finance long-term projects could reduce the country’s ability to respond to sudden external pressures.
Can reserves be invested?
The existence of restrictions on government spending does not mean reserves must remain idle, as central banks can invest foreign assets in liquid instruments while preserving access to the funds when required.
“Because the reserve should not just be sitting there. It’s like you have money in your savings account and you also have money in your current account,” Yusuf said.
“If the money is getting more, you move some to savings. You know? So that is what people do. That is why some countries have what you call, sovereign wealth fund.
“Countries with very large foreign-currency buffers may also establish sovereign wealth funds to invest part of their excess assets in ways that preserve liquidity and generate returns.”
He stressed, however, that investing reserve assets was different from converting them into funds for government expenditure.
The debate over Nigeria’s $53bn reserves therefore centres not simply on how much money the country has, but on the purpose for which those foreign assets are held and the consequences of reducing the buffer while the economy remains exposed to external shocks.
