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You are here:Home>>Strategic Research & Analysis>>Emeka Chiakwelu>>Nigeria: Strong Foreign Reserve for Currency Stabilization 
Sunday, 10 March 2013 15:01

Nigeria: Strong Foreign Reserve for Currency Stabilization 

Written by AFRIPOL
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“Nigeria’s Foreign Reserve at $47 Billion. A Strong foreign reserve is good economics.”  - AFRIPOL

 

Beyond its cosmetics largess and intimidating attribute, strong foreign reserve plays a fundamental role in the stabilization of a nation’s currency. In case of Nigeria, the country’s currency which is naira must be stabilized for a healthy and thriving economy to be sustainable. Naira’s stabilization can be functionally achieved when a reasonable accumulation of foreign reserve is met and sustain.

 

At the interim, Nigeria foreign reserve stood at $47 billion; with naira increasingly stability and rising oil price, the erstwhile depleting  external reserve fund have been replenished. In September 2008 the foreign reserve was $62 billion and it was propelled solely by high price of oil. But now the stabilization of naira is coming into a play, thus aiding in propping up the reserve by bolstering strong confidence in the investors, thereby attracting portfolio  investments.

 

The role of naira stability must be treasured for contributing to the appreciation of the foreign reserve. Sound macro-economic stability, essentially the stable naira has open door to inflow of investments especially in the capital market.

 

Many Nigerians including many high ranking politicians are lately questioning the reason for the accumulation of relatively large foreign reserve by Nigerian government, which was engineered by the country’s financial policy makers. Therefore it makes ample sense that the role of foreign reserve must be readily made available to all Nigerians who are eager to understand how it works. The policy makers at executive branch and at country’s apex bank have not done a good job in communicating to stakeholders – the masses of Nigerians who are surviving with less than $2 a day while country is maintaining a large foreign reserve.

 

Naira must be protected from fierce and perilous world of currency trading especially from hostile speculators that are bent on making their ‘kill’ without being considerate on the detrimental side effects of their actions.

 

A strong foreign reserve becomes a bulwark to speculators who will be intimidated by large foreign reserve of a nation. Strong foreign reserve becomes a powerful tool for adjustment of the exchange rate when it deems necessary with regards to the international trade and payments.

 

Foreign exchange reserve can be used to stimulate export and depressed importation. An export orientated nation with arrays of products to export does not want a very high valued or overvalued currency that may make their products expensive for foreign buyers.  In this case, the country will tap into her reserve and buy foreign notes that will lessen the value of her currency.

nairaland

 

But to discourage importation, the strong reserve comes into handy too, by buying up local notes that will make imported goods expensive and increased the value of the local currency.

 

An ample foreign reserve gives a sense of power and security for a nation to be able to manipulate is exchange rate and value at its will and when she deems it necessary.

 

At the macroeconomics level, a strong foreign reserve is quite significant. When it comes to quantity of international trade and commerce; the regulation of inflation and employment with desirable outcomes  could become realizable with strong foreign reserve in the hands of good managers.

 

United States of America has been complaining that China is manipulating her currency for her own maximum benefit. American politicians and policy makers  are concerned about China’s relatively weaken currency that made it possible for China’s products to be cheaper to buy, simultaneously making it more expensive for local Chinese consumers to buy foreign products.

 

China per say is not doing anything illegal but they are rather tapping into their incredible mind-blowing foreign reserve that may be up to three trillion dollars. With such an enormous and large foreign reserve, one can correctly say that China is manipulating its currency but she is not breaking any laws. China is playing the game to beneficent of her economy. The big problem in this case may be the potential invitation of trade and currency war, such a scenario will not be a welcomed development for the global trade because everybody will be a loser.

 

As the governor of Central Bank of Nigeria acknowledged, "We need to go into a period of strong and serious fiscal restraints and consolidation. We must continue to build up external reserves and protect the economy from external shocks and focus on the strength and resilience of the banking system. We are building buffers for the economy in the event of external shocks."

 

That is a well taken point because Nigeria is still a chiefly one commodity based economy. Nigeria’s majority of foreign reserve comes from oil export and a sudden drop in the price of oil will greatly affect the economy and reduce the reserve. It is therefore logical and necessary for building up of reserve to continue, for nobody knows how long the price of oil will stay up. Nigeria without diversity of the economy is still hanging by the thread whenever the price of oil nosedives.

 

Nigeria’s quest to become a major industrial economy by 2020 or 2030 requires a sound macroeconomics. Therefore the importance of an enabling foreign reserve cannot be overemphasized.  A strong economy is an economy that has the financial and economic tools needed to set its agenda, bring it to fruition and to be sustainable on a global scale despite competition. Therefore in today’s Nigeria and in the future, a strong foreign reserve is inevitable.

 

 

 

 

 

 

 

 

 

 

 

 

 

Last modified on Monday, 11 March 2013 15:26

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