Much ado about the foreign reserves + Extras

My article in the guardian yesterday was about the central bank’s foreign reserves, what it means, and why we care about it. You can read it online here.

Two things I did not mention in the article due to space constraints.

First, its great that the foreign reserves are much higher than the lows we saw in 2015, but the important thing is the direction. As long as inflows are higher than outflows then foreign reserves will keep going up. Importantly, it implies that there is no imminent collapse of the exchange rate and the current rate can be sustained for a while.

Of course if you follow my blog you will know that I am not a fan of de facto fixed rates and would prefer a more flexible exchange rate, either market driven or at the very least REER targeting.

Second, it would be foolish to see increasing foreign reserves as some kind of marker that everything is OK. Structurally, the Nigerian economy is still identical to what it was before the recession in 2014. Crude oil exports and foreign portfolio flows still dominate foreign exchange inflows, and both are susceptible to reversals. With crude oil, a depression in prices or disruption in the Niger Delta could cause a quick reversal. Given that we are in an election year then it would not be too far fetched. Portfolio funds are also notoriously fickle and bet on them at you peril.

As you can see from the graph above, the central bank had almost $50bn in reserves in mid-2013 but we still ended up with a currency crisis. From a policy perspective, the important thing is to be flexible and to demonstrate that flexibility. If there’s a reversal in foreign exchange flows, and we repeat the rigid policies of the past, then $42bn in reserves won’t mean much.


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