Nigeria may be paying more than $10bn annually to maintain its foreign reserves, despite earning relatively low returns on the dollars held abroad, according to former Chairman of Fidelity Bank, Mustafa Chike-Obi.
Chike-Obi said the cost of accumulating and maintaining foreign reserves should be weighed against the benefits they provide, warning that a larger reserve balance does not automatically translate into improved economic welfare.
He made the remarks on Thursday during an episode of ‘Policy Without Politics’, a podcast he hosts with Ken Ikpe.
According to him, Nigeria earns about three per cent on liquid assets held as reserves, while the naira funding those assets carries a cost of about 20 per cent.
This difference, he said, creates an annual cost of roughly 17 percentage points, assuming the naira’s nominal value remains unchanged.
“For every dollar reserve you have, you are losing 17 per cent a year if the naira stays at the same nominal level,” Chike-Obi said.
Applying that difference to reserves of between $52bn and $53bn, he estimated the annual cost at more than $10bn.
The estimate reflects the difference between the return on reserve assets and the cost of naira funding. It is not necessarily a direct cash payment of $10bn by the government, and the actual economic cost would depend on the funding structure, exchange-rate movements and other factors.
Chike-Obi challenged the view that rising foreign reserves are, on their own, are a proof that Nigeria’s economy is getting stronger.
He said reserve assets must be held in liquid investments abroad so that the country can access foreign currency when needed. Such holdings may include deposits and other short-term instruments with international financial institutions and banks.
He cited branches of Nigerian banks in London and global financial institutions such as JPMorgan as examples of places where reserve-related assets may be held.
Not every foreign investment qualifies as a reserve asset, he added. A long-term investment, such as a 10-year South African government bond, would not meet the liquidity requirements for official reserves.
Chike-Obi identified two main reasons Nigeria needs foreign reserves: to meet its international payment obligations when they fall due and to reassure trading partners and lenders that it can pay for imports.
He argued that the appropriate level of reserves should therefore be determined by the country’s expected foreign-currency needs, rather than by a target of continually increasing the headline figure.