Tosin Adeoti wrote this - long but worthy of a read.

I found myself having to explain the concept of foreign reserves to a fellow today.

It was on the news this morning that the government is looking to borrow $2.5 billion from the World Bank (the same World Bank they say gives wrong stats...a case of I want your money, I don't want your opinions), and was wondering why we are borrowing when we have $41.85 billion in foreign reserves.

I mean, why can't we just take the money from the foreign reserves instead of this constant borrowings, right?

Well, no.

Foreign reserves is probably the wrong word for that $41 billion, at least as the layman knows it. If you reserve money, it means that it's yours for the rainy day, right? Not so in this case.

Here's what happens:

- Nigeria sells stuff to the world, mainly oil since... *let me just keep quiet*, and collects dollars. Dollar is the de facto world currency so most countries change their currencies to dollars and pay for what is bought.

- After collecting the dollars, i.e revenue, the federal government approaches the CBN to change the dollars to Naira. Why? The government cannot spend revenue in dollars in Nigeria. It pays its contractors and workers salaries (and other obligations) in Naira, not dollars. Why CBN? Because CBN is the only authorized organization with the power to print Naira. So CBN collects the dollars and gives Naira to the federal government.

- The government spends the Naira. The CBN keeps the dollars.

The dollars that the government gives the CBN is what is known as FOREIGN RESERVES.

As you can see, the dollars no longer belongs to the government. That's why it's silly for any government to boast about its foreign reserves.

It's as silly as you exchanging NGN360,000 for $1,000 from a roadside mallam, and boasting to your friend that you have a 'reserve' of $1000. Bros, it's no longer your money.

So what's the use of the dollars with CBN to Nigerians? Smart question. That's the dollars CBN has to give to anyone who needs to buy things from abroad.

Innoson wants to buy vehicle parts, it gives CBN Naira in exchange for dollars and he pays his suppliers abroad. You want to buy Gucci shoes from Amazon via your GTBank Naira card, your bank changes the Naira in your account to dollars with the CBN and pays Jeff Bezos in dollars.

In other words, CBN cannot spend the dollars with it, it can only sell it in exchange for Naira so imports can happen.

It’s ‘reserved’ for making foreign payments.

Understood this way and you can appreciate why it's important for us to sort of have a big reserve because foreign reserves determines the amount of stuff we can import at any time.

What I mean is that if the people in Nigeria spend $10bn per month on imports and the CBN only have $30bn in reserves, it means we are covered for only 3 months.

So back to the guy's question, the World Bank's $2.5 billion loan has nothing to do with the $41 billion with the CBN.

Therefore, the next time your politicians try to swindle you by bragging about how much money they have in foreign reserves as an indication of wealth, tell them you're not buying what they're selling.


THIS WAS SENT TO ME ON WHATSAPP, SO I DECIDED TO SHARE TO EDUCATED MY FELLOW NIGERIANS LIKE MYSELF WHO DIDN'T KNOW.

Welldone boss. We need more knowledge

Even by your own definition, the amount of foreign reserves you have determines how much you can trade on the international market and also how stable your currency will be.

If you have nothing in your foreign reserves, your spending power is nothing and you cannot import. We need a huge foreign reserve base because we are an import based economy.

Deleting your foreign reserves will bite you and your currency will start flip-flopping or the CBN wont have fOREX to give industries to import raw materials.

And yes, a government can brag about raising Foreign reserve as this makes you stable and increases investor confidence.

Mynd44:
Even by your own definition, the amount of foreign reserves you have determines how much you can trade on the international market and also how stable your currency will be.

If you have nothing in your foreign reserves, your spending power is nothing and you cannot import. We need a huge foreign reserve base because we are an import based economy.

Deleting your foreign reserves will bite you and your currency will start flip-flopping or the CBN wont have fOREX to give industries to import raw materials.

And yes, a government can brag about raising Foreign reserve as this makes you stable and increases investor confidence.

I am not saying govt. shouldn't brag about their foreign reserve. I thought before now foreign reserve was more like a savings where the country can draw from in times of shortage. But as it were that is just where you draw money from for imports

Mynd44:
Even by your own definition, the amount of foreign reserves you have determines how much you can trade on the international market and also how stable your currency will be.

If you have nothing in your foreign reserves, your spending power is nothing and you cannot import. We need a huge foreign reserve base because we are an import based economy.

Deleting your foreign reserves will bite you and your currency will start flip-flopping or the CBN wont have fOREX to give industries to import raw materials.

And yes, a government can brag about raising Foreign reserve as this makes you stable and increases investor confidence.

Thumb up for coming to OP's rescue.