What’s Inside Nigeria’s Foreign Reserves?


It was former president Obasanjo who started this whole business of turning the nation’s foreign reserves into an achievement to be celebrated. When Obasanjo took office in May 1999, Nigeria’s foreign reserves were just under $5bn. By the time he left in May 2007, it was $43bn. But beyond that, there was a difference in the composition of the reserves from today. For simplicity, let’s distinguish the two types of reserves as Paper and Cash Money. Out of the $43bn left by Obasanjo, around $11bn was Cash Money. 

Cash Money is money in the bank that you have not spent. You can dip into it on a rainy day. The best example of this for Nigeria is the Excess Crude Account. But Paper is quite different. Imagine that in March, Nigeria sold crude oil and earned $1bn from it. That money goes into a CBN account abroad. CBN calculates the naira equivalent at the official rate and gives it to the FG i.e. N305bn. The FG takes the money and pays salaries, wastes some and the rest disappears. The key thing to note here is that once the CBN has given the FG naira, the dollars no longer belong to the FG. The FG cannot spend that $1bn again even though it is sitting there as part of Nigeria’s reserves. So what is it for? Let’s say a guy named Pastor Oyoyo wants to import a set of drums, guitars and hair cream for his new church, Fire for Fire InterGalactic Ministries. The total for all the imports come to $1m. He gives his bank N360m, his bank gives maybe N350m to CBN and CBN gives $1m to his bank. The bank gives him maybe $999,990 and he uses the money to pay for the imports.

So we come to the current reserves. A few days ago, the CBN announced it had hit $46bn. In a recent speech, President Buhari also boasted that his government had grown the foreign reserves from $24bn in 2016 to $46bn today using its special Magique Systeme. But there’s something interesting about this growth – the big change has all happened in the last year or so. What did Godwin Emefiele (popularly called Meffy) do to achieve this? This growth has three components.

Component 1 – Since February 2017, Nigeria has issued $7.3bn worth of Eurobond debt (02/17 – $1.5bn, 06/17 – $300m, 11/17 – $3bn, 02/18 – $2.5bn). For context, from 2011 to 2015, Nigeria only did $1.5bn of Eurobonds. When Nigeria sells Eurobonds, the dollars are paid to CBN. Meffy then converts it to naira and gives the naira to the FG. In other words, that $7.3bn is added to Nigeria’s reserves as part of the Paper Reserves. Again, the FG cannot spend it because it has already collected the naira equivalent.

Component 2 – Nigerian banks have lately been practicing an innovative type of banking that economists and scholars have described as Advanced Shashe Banking (ASB). Imagine a Nigerian bank named Seneat. This bank goes abroad and borrows $1bn via a Eurobond at 7% interest. It then does a swap with Meffy where it gives the $1bn to CBN at say N350 to $1 with an agreement to buy it back in 1 years time at say N360 to $1. This means that no matter what happens in a year time, CBN must sell $1bn back to Seneat at that rate. Seneat now takes its N350bn and buys lots and lots of FG treasury bills at 17% while Meffy adds the $1bn to the reserves. CBN has stopped publishing the swaps numbers since last year but I have some very clever friends who have calculated the current total to be $6bn.

Component 3 – Since the CBN ‘stabilised’ the forex market last year with the launch of the I&E Window, much more foreign investment than before has come in. This is mostly made up of FPI where foreign investors bring in money to buy shares and government bonds. It’s different from FDI which is to build factories etc. Nothing wrong with FPI of course but its nice(r) when you have both. Again, they give their dollars to CBN and get naira to buy the shares they want. When they want to leave, CBN must collect their naira and give them dollars. And from experience, we know they usually run away close to elections in Nigeria given the way Nigeria behaves around that time. So how much is this component? It is hard to tell as CBN does not publish the numbers but I calculate to be around $9bn.

I have simplified the components to save time and space. The only portion of the current reserves that is Cash Money is the ECA which has $2.3bn. But as I showed in my previous column, all the money in the ECA has been borrowed against which means it’s also Paper. Next time you hear the FG boasting about growing the reserves, remember it is costing quite a lot to grow it this way. And then decide for yourself how much credit to allocate to Meffy and the FG for it. 800 words are enough for the wise.


Written by:  Feyi Fawehinmi,