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.
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.
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