Nigeria: Nigeria's External Reserve – A Role Play For Gold Mining

Last Updated: 9 May 2018
Article by Ikechukwu Nwakanma and Bukola Oyinlola-Anuwe

After a crippling economic recession, Nigeria's foreign reserves are once more on the rise. The United States Dollar remains the primary reserve currency used by approximately two thirds of the nations of the world. Nigeria is no different. In principle, countries hold Dollar reserves to meet unexpected and temporary fluctuations in international payments; given that the US Dollar is the most stable and widely accepted foreign currency in international trade. In recent times however, many nations have threatened to upset the global dominance of the US Dollar as the world's trade currency. Countries like China and Russia have been at the forefront of this trend.

A report by Global Research (December 21, 2017 edition) stated that the Shanghai International Energy Exchange is preparing to launch its crude-oil futures contracts, denominated in Yuan. The process is to ensure that companies sell crude oil to China in Yuan. China is currently preparing to release a Yuan-denominated oil futures contract that is convertible (backed by) physical gold through gold exchanges in Shanghai and Hong Kong. This move is predicated to dethrone the US dollar as the world's reserve currency system. Interestingly, just this April 2018, the Central Bank of Nigeria (CBN) executed a $2.5billion bilateral currency swap agreement with the Peoples Bank of China (PBoC). The aim of which is to provide adequate local currency liquidity to Nigerian and Chinese industrialists and other businesses. By this deal, Nigeria actually diluted its reserves held in Dollars with Yuan.

These trends have colossal implications for countries like Nigeria which are almost wholly dependent upon the US Dollar as their only form of economic reserve. To safeguard economic stability in the event of significant fluctuations in the Dollar occasioned by large scale shifts in the market, there must be a diversification to a more balanced basket of reserves. A viable commodity that can aid this diversification is gold.

For centuries, the main precious metal used as a reserve has been gold. This is due to its unique chemical specifications which make it unable to react with any element, including acids; and therefore, a valuable store. Nigeria has proven reserves of over 600, 000 ounces of high grade gold confirmed across ten major sites, with over 30 companies and cooperative societies licensed to explore and mine gold. However, the country continues to rely on an external reserve derived mainly from the proceeds of crude oil production and sales; denominated almost wholly in US Dollars. Over 90% of the country's foreign exchange earnings is from the sale of oil. This makes its reserve balance particularly vulnerable to fluctuations in crude oil prices. With a barrel of oil pegging at its ultimate low of a little less than $30 per barrel in 2016, Nigeria's external reserve dipped to approximately $29 billion in the second quarter of 2017. A dangerously low reserve for a country with foreign debt far exceeding reserves. This over- dependence on the sale of oil for the growth of the economy, mounted immense pressure on the demand for US Dollars in 2016/2017; thus depleting external reserves and significantly weakening the Naira. A situation the country is yet to fully recover from. A further occurrence of such an unmitigated plunge in the value of the Naira, could set the country back by decades in terms of its economic development.

There can therefore be no time like the present in terms of the need to urgently diversify external reserves. In 2017, China and Russia launched a "Payment Versus Payment" (PVP) system. A system that promotes the exchange of the Chinese Yuan and the Russian Ruble transactions for sale of crude oil and other trades. In addition, the Russian Ministry of Finance is reportedly planning the first sale of Russian debt in the form of bonds denominated in Chinese Yuan. The size of the first offering, a test of the market, will be 6 billion Yuan or just under $1 billion. The sale is being organized by the state-owned Russian Gazprom Bank, the Bank of China Ltd., and China's largest state bank; Industrial & Commercial Bank of China. These developments, when viewed alongside the Shanghai International Energy Exchange having futures crude oil contracts denominated in Yuan, put Nigeria's reserve in USD at increased risk of taking a further plunge – in consideration of the crude oil trade volumes between China and Nigeria. In 2017 the crude oil trade volume between China and Nigeria stood at about $13.8 Billion. Now that this trade volume will now be denominated in Yuan in view of the recent currency swap deal, the death of US Dollars is only eminent, leaving Nigeria's dollar national reserve at a greater risk.

The Central Banks and Treasuries of most developed countries own a significant amount of reserve in the form of a diversified portfolio of foreign currencies, foreign governmental bonds, and precious metals. In consideration of the volatility of our external reserves currency, there is need for a policy shift by the Nigerian government. Focus should be placed on other stable commodities with more global standard value. Nigeria is blessed with over 44 precious minerals. Perhaps an external reserve in precious metals such as gold will help lessen the dependency on crude oil and avoid stringent financial policy such as arbitrary restriction of access to FOREX as has been done in the past.

The Nigerian mining sector, though a shadow of its former glory post-independence; with the sector then contributing about 30% of the nation's GDP, is gradually becoming a force to reckon with once again. From contributing a meagre 0.3% (about N3.5 Billion) to the national GDP, the on-going reforms in the sector have brought about significant positive changes that are expected to increase the sector's contribution to about $27 billion (about N9.7 trillion) by 2025. Limestone and gold are said to be the foremost precious metals that will assist in making this prediction a reality.

A Federal Gold Reserve Policy?

The United State of America holds about 74% of its total reserves in gold. The only country with a higher percentage of its reserves in gold is one of the poorest in the world; Tajikistan. One might say that both countries; arguably the richest and the poorest in the world, hold majority of their wealth reserves in gold, because while one is too large to risk economic failure, the other is too small and frail to similarly risk economic failure. European countries similarly maintain a formula of holding high gold reserves relative to total reserves. Germany holds 3,377 tons of gold, representing 68.8% of its reserves; Italy with 2,451 tons representing 67.8% of its reserves to mention a few.

Being the custodian of the country's external reserves, the Central Bank of Nigeria (CBN) stands in a vantage position to advance the diversification of Nigeria's reserves. By the provisions of the CBN Act 1991, the CBN is expected to have gold as part of its reserves, amongst other assets. With the statutory powers to maintain a reserve of gold and its statutory responsibility to promote a sound financial system, the CBN in ensuring that the nation's external reserve remains formidable, should strongly consider having a gold reserve policy. Gold has an inverse movement with the dollar. As the demand for gold rises, gold prices will go up, thereby devaluing the Dollar. However, though the price of gold is often benchmarked in US Dollars, it can also be traded in any of the top currencies in the world, i.e.; Australian Dollars, Canadian Dollars, Euros, Japanese Yen, Swiss Francs and British Pounds. This makes gold a more attractive and stable commodity to have as an external reserve. A CBN policy to have a larger gold reserve can also serve to boost the commercial quantity of gold production in Nigeria.

Conclusion:

As at April 2018, Nigeria's foreign reserves were beginning to peak again after a long period of decline; at about $47.37 billion. To safeguard against monetary and economic risk, it is imperative that an alternative reserve commodity is considered as a safety net against the call on currency reserves. Gold ounces are not susceptible to sudden crashes, but rather a lingering lull in prices – which can easily be spotted by economists. This helps to assure of a stable and enduring wealth reserve. Although gold has no formal position in the international monetary system today, it nonetheless continues to play an important role, constituting about 12% of international reserves.

There are other advantages of having part of the country's foreign reserves in gold. Aside the exponential benefits of having a gold reserve, it is not easily deplete-able or launder by those in power. For a country that has grappled with corruption for decades, a shift away from the US Dollar as the sole source of external reserve, will create complications for dishonest public officials. Due to the bulk and weight of gold bars and other precious commodities, the nuts and bolts of their looting are more difficult to disguise.

It is therefore worthy on the part of CBN to consider the prospects of having gold as part of its external reserves or any other precious metal in accordance with the global standard system. Truth be told, if Tajikistan, one of the poorest countries can hold 81% of its reserves in gold, Nigeria with an even greater potential can do much more.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions