Anytime we hear about foreign reserves, we just learn about the movement in the reserves, whether upwards or downwards. Most people do not understand the composition of a country’s foreign reserves and just assume it is made up of hard cash stored somewhere.
According to the Central Bank of Nigeria, foreign reserves are assets held on reserve by a monetary authority in foreign currencies. These reserves are used to back up liabilities and influence monetary policies. They include foreign banknotes, deposits, bonds, treasury bills, and other government securities.
The International Monetary Fund (IMF) states that international reserves are those external assets that are readily available to and are controlled by a country’s monetary authorities. They comprise foreign currencies, other assets denominated in foreign currencies, gold reserves, special drawing rights (SDRs) and IMF reserve positions.
READ MORE: Nigeria’s External Reserves drop by $2.9 billion, hit 10-month low
Why does a country have foreign reserves?
These reserves may be used for direct financing of international payments imbalances or for indirect regulation of the magnitude of such imbalances via intervention in foreign exchange markets in order to affect the exchange rate of the country’s currency.
In essence, foreign reserves give the government the confidence and resilience to withstand shocks if a country’s currency crashes or devalues.
What are Nigeria’s external reserves composed of?
The CBN Act of 2007 provides that the apex bank shall maintain a reserve of external assets consisting of all or any of the following:
- Old coin or bullion;
- Balance at banks outside Nigeria where the currency is freely convertible and in such currency, notes, coins, money at call, and any bill of exchange bearing at least two valid and authorized signatures and having maturity not exceeding ninety days; exclusive of days of grace;
- Treasury bills (with a maturity period not exceeding one year) issued by the government of any country outside Nigeria whose currency is freely convertible;
- Securities of, or guarantees by, a government of any country outside Nigeria whose currency is freely convertible, provided such securities shall mature in a period not exceeding ten years from the date of acquisition and are of such investment grade as may be determined by the Board from time to time;
- Securities of, or guarantees by international financial institutions if such securities are expressed in currency freely convertible, in the form of investment-grade assets as may be determined by the Board and maturity of the securities shall not exceed five years;
- Nigeria’s Gold Tranche in the International Monetary Fund (IMF);
- Allocation of Special Drawing Rights (SDR) made to Nigeria by the IMF; and
- Investment by way of loans or debenture in an investment bank or development financial institutions within or outside Nigeria for a maximum period of five years.
READ ALSO: IMF ranks Nigeria’s sovereign wealth fund second-worst in the world
The conditions for such investment are that:
- The amount invested should not more than 5% of the total reserves;
- The reserve level at the time should be able to sustain twenty-four months of import; and
- The loan or debenture is in foreign currency.
Nigeria’s external reserves as of the time of publishing this article stood at $34.673 billion.
