Nigeria has 40.4 billion dollars in it, but what is an External Reserve?

The Central Bank of Nigeria (CBN) has announced that the Country’s external reserve now has $40.4 billion; the highest amount it has ever reached since 2014.

Announcing the new development, Acting Director, Corporate Communications at the CBN, Isaac Okorafor, said the reserve revealed an increase of $4.8 billion, in comparison to $35.6 billion of December 5, 2017, after CBN injected $210 million into the interbank window of the foreign exchange market.

Okorafor also stated that the increase was a product the of bank’s strategy to effectively manage forex demand by various sectors of the economy.

Citing the CBN’s policy of restricting access to Forex from the official Forex market by importers of 41 items as the major turning point, Okorafor said the policy had helped to stop the uncontrollable losses suffered by the country’s external reserves, which hitherto witnessed heavy depletion due to the huge import bill and other debt obligations.

He also added that the policy had ensured a decline in Nigeria’s import bill from over $5 billion monthly in 2015, to about $1.5 billion in 2017, while expressing hope that the reserve would continue to grow in the New Year.

CBN Governor, Mr. Godwin Emefiele, said last November, that the reserves would grow to $40 billion by the end of 2018, but the target was attained a year earlier.

“For one, our import bill may have fallen but our manufacturing and agriculture sectors still have a long way to go if we must attain self-sufficiency in those sectors.

“We must not be quick to discard the restrictive measures which aided our recovery simply because the metrics have improved.”

A breakdown of the figure showed that the CBN offered $100m to the wholesale sector while the small and medium enterprises (SMEs) and invisible windows each received $55 million.

WHAT IS EXTERNAL RESERVE

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External reserve also known as foreign reserve is the assets held by the Central Bank of a Country, used in paying liabilities on their own issued currency, as well as to influence monetary policy.

Foreign exchange reserves are traditionally used to back a Nation’s domestic currency. However, foreign reserves are now more commonly used as tools for monetary policy, especially in countries with desire to pursue a fixed exchange rate.
External reserve is also in reserve currencies; a currency commonly used for international transaction, which in this case is the ‘United States Dollar’ (USD).

HOW IT WORKS

A central bank that implements a fixed exchange rate policy may face a situation where supply and demand would tend to push the value of the currency lower or higher (an increase in demand for the currency would tend to push its value higher, and a decrease lower) and thus the Central Bank would have to use reserves to maintain its fixed exchange rate.

Exchange reserves are also as risky as any other investment; should a currency collapse, all foreign exchange reserves held in that currency around the world will become worthless.

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Nigeria has 40.4 billion dollars in it, but what is an External Reserv…

by Sulaiman Olayinka Saddiq time to read: 2 min
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