What a thriving foreign reserve implies

Olumide Adekogbe

What a thriving foreign reserve implies
Nigeria's foreign reserves have been going through some ups and downs in the last couple of years. These fluctuations are strange considering the changing patterns in international trade and some other dynamics in the economy of the state. The nation's foreign reserves, in particular, have been affected by the reduction in oil prices, increased demands for foreign exchange and the instability of the naira- a situation which had often made the Central Bank of Nigeria (CBN) to defend the currency by falling back to the foreign reserve.
However, some discrepancies and the non-implementation of watertight economic policies may have also contributed to the fluctuations. Back in December, 2011; Nigeria's foreign reserve stood at US$44.6 billion but in the space if three (3) years- by the end of 2014- there had been a reduction of about 22%. That downward spiral continued into 2015 and 2016- although there were some minor rise recorded around 2016- as the we had to grapple with the devastating effects of recession and pipeline vandalization on the nation's economy, and by October 19, 2016, the reserve had fallen to US$23.89 billion. As the country came through the turbulent waters of recession [with the increase in oil price and a crude oil production rate in excess of 1.7 million barrels per day], we began to see a considerable rise in the foreign reserve- from US$26.0 billion in January 2017 to US$34.53 billion by the end of the same year. That figure fell below CBN governor's projection [of US$40 billion] for that year but in no distant time, that prediction was surpassed as the foreign reserve hit US$42.8 billion in February- the highest we have had in thirteen (13) months. The US$3 billion raised from the sale of the Eurobond issued by the federal government late last year also played a major part.

But what does this accretion in the foreign reserve imply?
Before I proceed, it is important to point out that the government's decision to clamp down on the importation of certain commodities is now heeding dividend.
Now, while a thriving foreign reserve could be indicative of an economy that is set on the right track, it is worth noting the specific ways this (foreign reserve) can affect the overall economy of the nation. With a continual accretion [and the eventual realisation of a large foreign reserve], the following advantages are probable:

list itemCushioning effect against external shock: A thriving foreign reserve makes it easy for a nation to hold its economy in shape- albeit temporarily- when incidences of financial crisis or unfavourable market trends occur. For instance, a robust foreign reserve can serve as 'saving grace' in moments of dwindling oil prices.
list itemMakes the country investors' destination: In some instances, the state and/or strength of the foreign reserve is one of the indices investors use in measuring how friendly or safe a particular economy is to do business in. With a flourishing foreign reserve, investors' confidence is won, and the likelihood of them doing business in the country is high.
list itemGives CBN more control in the foreign exchange market: Since foreign reserve can be used as tool for monetary policy, and with Nigeria's inclination towards a fixed exchange rate, a healthy foreign reserve will enable the Central Bank of Nigeria have some degree of control in the foreign exchange market thus ensuring that the rates are stabilized.