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Should we be
concerned that, lately, the stock of the nation’s foreign reserve is
being run down at rates that appear unsustainable even in the
short-term? The apprehension with which the newspapers reported last
week the fact that by Monday, our foreign reserves stood at US$35.66bn,
the lowest level since April 2006, and down from the May 2008 high of
US$62.24bn, seems to suggest that we ought to.

However, before
panic sets in, how do foreign reserves matter to the economy? The
relatively simple nature of our economy, depressed final demand, almost
non-existent local production of anything of value, abysmal levels of
domestic productivity, all these ensure that the quantum of reserves
directly affects the naira’s exchange rate. And in an economy where
everything is “made in China”, a volatile exchange rate could be a
problem indeed.

On the other hand,
our managed exchange rate regime also forces us to include inflation
considerations in the concerns associated with the rate of depletion of
our foreign reserves. Can the Central Bank of Nigeria (CBN) continue to
intervene in support of the national currency, even as its main
ammunition for this is depleted? Or put differently, how soon before we
are called upon to choose between an exchange rate crisis and devaluing
the naira? Most commentators imagine that this scenario would not play
out before the general election is done. Apparently, no central bank
governor would want to act in a way that hands victory to any opponent
of an incumbent president. If after the election, the naira begins to
buy fewer dollars than it was wont to, inflation figures may then trend
up, as the value of our imports rise relative to the value of the naira.

But then, isn’t it
the case that we worry too much. Lamido Sanusi, the central bank
governor, has re-assured to no end, all as might care to attend to him,
that his leadership of the CBN is not minded to devalue the naira.
Besides, apart from the muscle provided by external reserves, within
the context of a managed exchange rate regime, the central bank has a
slew of administrative controls with which it could impose costs on the
demand side of the official foreign exchange market. The tension that
will arise were it to resort to these tools, between appearing to
abandon market-based solutions, and seeming to act in the interest of
the domestic economy, should comfortably be resolved in favour of the
latter. In the end, the fear of the depreciation of the naira in an
import-dependent economy might be overdone. Moreover, the current
levels of the reserves can still support several months of imports.

Thus assured, the
next question is, aside from the sense of the naira’s value as somehow
reflective of the nation’s virility, how harmful is this loss of the
foreign reserve?

We will have to
borrow metaphors here. Recall that it did not matter that the balance
on the excess crude account was run down faster than any of us could
count the cents. Remember also, that nothing happened thereafter. And
although state governors had objected to the sterilisation of
relatively scarce foreign exchange earnings in the “unconstitutional”
excess crude account (at a time of extreme need in their respective
states) salaries are still owed public sector personnel in most states;
and the infrastructure deficit grows dire daily. Inflation,
interestingly, has remained unusually restrained. So once again, we
confront another uniquely Nigerian quandary. Where is the money?
Inflation isn’t up, because the infusion of cash into the economy from
monetising the excess crude account wasn’t expended on anything that
might drive local demand. And the CBN prefers to see a repatriation of
earnings as responsible for the spike in demand for foreign currencies
at the official market, rather than capital flight.

Admitting to the
logic of the central bank, one ought to ask, “how much was earned in
the economy last year?” By whom (it would help the argument if
non-resident economic entities were the most profitable)? And why
should the default response on the part of such economic entities be to
shop all such earnings out, rather than re-invest in an economy healthy
enough to have generated such rich pickings in the first instance?

Strengthened by these perspectives, the economy is clearly immune to economic logic!