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Nigeria's Foreign Reserves and CBN's Limits on ATM/Debit Card Transactions

December 27, 2015

The president's team needs to accelerate the recovery of misplaced funds, and the focus needs to be on foreign currency-denominated loots (we don't need their naira-denominated loot - the CBN can print naira)

I'm yet to understand the seeming expression of public anger against the policies of the Nigeria's central bank to limit foreign exchange ATM/Debit card transactions.

Maybe I'm missing something and I need someone to educate me here but:

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1. According to the CBN, Nigeria depends on oil revenue for over 90% of its foreign exchange earnings. This leaves the country's foreign reserves extremely vulnerable to fluctuations in crude oil prices. Between July 2014 and now, crude oil price has plummeted 68% from $100/bbl to $37/bbl and the IMF (with other financial pundits) is predicting a further drop to about $20/bbl.

2. Periods of oil boom should, in theory, result in significant build up of reserves. While at it, the excesses liquidity should, also in theory, drive/fund sustainable economic diversification in preparation for any possible glut in the global oil market.

3. At $29b in foreign reserves and with a population of 150m, Nigeria clearly did not build up reserves in the time of boom. In the present glut with 68% drop in crude prices (and another expected 40% drop), it will require ingenious economic engineering to properly manage the nation's reserves. Nigerians simply can't afford to spend foreign exchange as if oil is still trading at $100 or as if the country's economy were sufficiently diversified. Otherwise, we would quickly run out of reserves (at the current spending rate) in approx. 5 months.

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4. Now, this is not rocket science, Nigeria's inability to build up reserves in the time of boom can only suggest that one of two things had put a downward pressure on the capital account:
    (a) The country spent a significant portion of its earnings on infrastructure, etc and most of the work was done by foreign companies who ultimately repatriated their income back to their country - hence the downward 'pressure' on Nigeria's foreign reserves
    (b) A significant portion of country's earnings was misappropriated (aka looted), converted to foreign currencies and stashed away in foreign banks.

5. My bias is towards 4(b). I think the mediocre $29b in reserves is primarily due to wasteful spending and funds that were looted in foreign currencies and moved out of the country. 

Therefore, the president's team needs to accelerate the recovery of misplaced funds, and the focus needs to be on foreign currency-denominated loots (we don't need their Naira-denominated loot - the CBN can print Naira).

I have it on record that I don't have any confidence in the president's economic team. My position is that the situation is more dire than this team can handle. I hope they prove me wrong.

Finally, maybe it's time to relax the hold on the Naira and just let it float.

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