Effective Management of Nigerian External Reserves


External reserves serve as means of international payment and settlement like other means of payment they have a derived demand. The first motive for over periods of deficits in international payments. This kind of motive is called transactory motive (T Motive). Thus, when increased demand for imports and decrease a payment gap, the gap could be filled by drawing on accumulated external reserves. The primary aim of transactory motives is that it’s easy to establish when it is realized that its easy to realized that a country that could achieve and sustain a state of authority would have any need what solver for external reserves.

The second motive is precaution any reserve are held as backing for local currency to increase international confidence in the currencies, and ensure the credibility of local monetary authority this section 23 of Central Bank of Nigerian Act, as amended in 1967, stipulated that the “value of the reserve of external assets shall see not less than 25 percent of the total demand liability of the bank”. The motive for these regulations is precaution any (p-motive) because the precaution is against eased of international confidence in the local currency. The motive for this regulation is precautionary.

A third motive could be identified as the speculative motive (S-motive) this motive is in form when a deliberate policy of accumulating foreign exchange for income yielding short-term investment(s) in pursued. However the first two motives transactory motive (+ -motive) and the precautionary notice (P-motive) constitute the dominant consideration for holding the reserves of external financial assets. They are therefore called and defined as the dominant motives. A delicate balance must be struck between the need to satisfy the dominant motives and the need to ensure that national resources are not tied up in un-necessary reserves. The raises the issue of optionality in reserve position which is a major factory in the management of natural reserves. The adequacy of external reserves could be measured with alternatives indicators, the equipment of the average monthly import bill for four (4) months is regarded as the optimum level of reserves to be held, this criterion is the operation role of thumb adopted by the international (Auxiliary Fund, C.I.N.F) in assessing the adequacy of external reserves.

The second criterion is the external reserves ration. This is the ration of the external reserves to demand deposit liability of the Central Bank unfortunately; there is no single value of external reserves rations, which commands an international recognition and acceptance. Each country is however governed by its own banking laws and reputations. In the Nigerian context therefore reserve adequacy could determined either in terms of four months imports requirement and/or items of the 25 percent internal reserves ration. Both measures are alternatives. Consequently the operational index of reserves adequacy for any period would be any of the two measures whichever is higher. Reserves is excess of operational index constitute surplus, which any short falls constitute deficits.


Reser 1990 2001

Year Total Reserves 2

No 1

Annual input 3


(N m1)

Required reserved 4

(N m1)

Surplus (+) (in (N m1)


(Deficit c-)

(in months) import equivalent 6

(N m1)

1990 150.4 756.4 252.1 – 1.7 – 1.1
1991 302.7 178.9 359.6 -50.9 – 0.6
1992 270.4 987.6 329.2 -58.6 – 0.7
1993 438.6 1,224.8 408.3 430.3 + 0.3
1994 3,471.6 1,737.3 579.1 + 2,892.5 + 20.0
1995 3,402.6 3.717.1 1,239.1 +2,403.5 + 7.9
1996 3,482.5 5,148 1,716.2 +1,766.3 + 4.1
1997 3,040.0 7,043.7 2,364.6 +695.4 + 1.1
1998 1,387.2 8,211.7 2,737.2 -1,350.0 – 2.0
1999 3,250.8 7,492.5 2,490.6 -760.0 – 1.2
2000 5,648.2 9,658.1 3,219.1 +428.8 + 3.0


Source: value of total reserves and import derived from eternal bank of Nigerian, Annual report (1990 – 2000).

  • The Changes in Nigerian External Reserves:

During the ten (10) years period (1990 – 2000) is given in a table 1 above. Through the period, the value of average of (3½) month import bill for each year was higher than the corresponding value of the required external reserves ration. Consequently, the inputs value of the criterion was adopted in estimating the value of the required reserves shown in column of the table 1. The surplus (+)/or deficit (-) in reserves for each period was calculated in two ways.

Firstly, nominal values of surpluses in two ways were determined as shown in column 5. Secondly each surplus or deficit was defined in terms of average monthly import bill equivalent. This is given in column 6, three distinct period can be identified in table 1, a period of deficit (1990 – 1993) followed by the period of surplus 1993 1997 and second period of deficit which started in 1998 but was interrupted briefly by a surplus in 1990. From January 1992, the external reserves position deteriorated, the level of reserves position of some thirty three, fifty percent from 2,599.3 million in December 1991 to N1, 990.4 million in January 1992 by April, the level of reserves position dipped below the one million naira more which, the country always forgeted. The external reserves position was in hopeless state and condition in 1992, particularly around the middle of that year, that was exactly when the whole Nigerian know that the economy of their country’s reserves was in shamble not only that the level of the country’s reserves low but also there was increasing net-flow of foreign exchange during most of the month comparable import figures for the period are not available. But it is obvious that the external reserves position was grossly in deficit on the basis of the imports value criterion indeed by mid 1992 the situation deteriorated to the extent that the available external reserves tell. Below the statutory external reserves ration. In August 1992 for instance the deposit liability of the Central Bank was 898.9 million, thus the external reserves requirement for month therefore N969.7 million. But the actual value of reserves available at the end of that month was only N878.3 million which implied a deficit of some N91.4 million.

The above factor as defined from the Central Bank establishes the above state of gross inadequacy in Nigerian’s external reserves position. The problem started way back in 1998. It took a turn for the worse in 1992 and become worst in 1993 before military regime interrupted to see of they could salvage the bartend economy.


  • The Plausive Explanation on the Nigerian External Reserves:

There has been a trend to politics debates on the current assets state of the Nigerian economy in general and the external reserves situation in particulars. The trend was unfortunate politician upon politician, regime upon regime rise and speck on it, and most of the time unprofessionally, without the actual holding for the discussion or actual holding of the problem. The national economies problem required a dispassionate non-partisan and disaquosis, by actually proper policy guidelines are to emerge. Let me therefore take a strict professional need of the issue. The three (3) plausible reasons that could advanced for the depressed level of reserves are as follows.

(i)      Unanticipated decline in export earnings.

(ii)      A rise in import bill.

(iii)     The drying of capital inflow in the form of foreign aids,

Grants and foreign private investments.

Decline in Export Earnings:-

Movement in Nigerian export earning in general associated with ripples in international oil politics. This is because Nigerian has a monocultural export trade sector with oil export according to, for up to 95 percent of total export earning. Hence general IBB spoke on IMF loan said that the way IMT sees issues, is that if we devalue our currency our export would go away which the import and on that ground the effect in Nigerian would be irrelevant because we hardly export any other thing ration than oil which is in dollars which is subject to currency fluctuation. Any drastic change, therefore in the volume and/or in the price of oil exports is bound to value a lot echo effect on the external reserves position. Towards the end of 1993 a number of intentional economies events strengthened the bargaining power of the Organization Of Petroleum Exporting Countries (OPEC).

And as a result, the export price of oil went up many times told that sudden jump in oil’s price was accomplished by another event which worked in favour of Nigerian in 1992 during IBB regime when politicians blue almost exporting the external reserve physically, the current experienced as exactly the arthitesis of the event of 1993/1994. Unfortunately Nigerian appears to have been caught unawares. The volume of oil export started to fall in the oil export is however attributed to a number of factors that led to the sluggish demand for African crude oil in the international oil market.

These include:-

(i)      Economic recessions in the industrialization countries of the west.

(ii)      Oil conservation measured in the industrialization countries which reduces global oil consumption.

(iii)     Or stock pilling of oil by member of the Internal Energy Agency (IEA).

(iv)    Disagreement within the rank of opens on primary and oil production quotas.

(v)     Over production and sale of oil by some member countries of OPEC particularly Saudi Arabia.

Pressures of Imports: The major problems however appears to the factor of demand the import bill simply outstripped the country’s foreign exchange supply functions. This could be illustrated with the experience of 19990191 within that last period, the total export earning decrease by 25.6%. From N19.077 million in 1990 to N10, 470 million in 1999. The import bill on the other hand rose by 25 4% from N9, 658 million to 12.013m. Two disturbing aspect of the high import bill need some emphasis first is the structure of import, is the country satisfied that she is importing only those things one really needs but cannot produce or cannot afford.

I due say that honest answer to this question cannot be a straight yes, surely Nigerian import more luxurious items than she needs and even more debasing foreign film than her citizen deserves.

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