Chike-Obi: Maintaining Nigeria’s Foreign Reserves Costs Over $10bn a Year

Mustafa Chike-Obi, former chairman of Fidelity Bank, has said it costs Nigeria more than $10 billion a year to hold its foreign reserves, which he put at $52 billion to $53 billion.

By: Ganiyu Olayinka

He made the remarks on Thursday on Policy Without Politics, a podcast he co-hosts with Ken Ikpe, according to ClarityNewsNG, which monitored the programme.

The cost argument

Chike-Obi said the reserves are held in liquid assets abroad that earn about 3 percent on average, while the naira used to buy them costs roughly 20 percent. If the naira holds steady at its current nominal level, he said, that gap amounts to a loss of 17 percent a year on every dollar held.

“So the $52-$53 billion reserves today is costing Nigeria an average of 17 percent,” he said. By his estimate, applying that rate to $52 billion gives more than $10 billion a year.

“Bigger is not better”

He argued that the cost of holding reserves must be weighed against their benefits, and that a bigger stock does not automatically leave Nigeria better off. He said many Nigerians now assume that larger reserves mean a stronger economy, which he called inaccurate because the dollars have to be invested in liquid instruments held abroad.

According to him, the assets sit with institutions overseas, including branches of Nigerian banks such as First Bank London, and with JP Morgan. He said investments that cannot be quickly accessed do not count as reserves, citing a 10-year South African bond as an example.

What reserves are for

Chike-Obi named two main purposes for holding reserves: meeting foreign obligations when they fall due, and reassuring trading partners and lenders that Nigeria can pay for imports.

“What that amount is needs to be managed. So bigger is not better,” he said. He said Nigeria should map out its schedule of foreign obligations and hold dollars to match it.

He said he did not know exactly how much Nigeria needs but believed it is well below $52 billion. The right level, he added, depends partly on import dependence, since a country that relies more heavily on foreign goods should hold larger reserves.

Latest figures

Central Bank of Nigeria (CBN) data show that Nigeria’s foreign reserves stood at $55.09 billion on 14 October, up from $51.94 billion on 28 July.