Riddles over Foreign Reserve and Excess Crude Account

Shamsudeen Usman, Finance Minister

Nothing has witness a lot of debate and controversy on the Nigeria’s economy in the recent time than the debate on the Foreign Reserve and Excess Crude Account. The major stakeholders seem to be in disagreement over the issue, likewise the public that have developed interest on what actually constitute the foreign reserve and excess crude account.

Central to this monetary palaver is the Central Bank of Nigeria, which is the custodian of the funds. Interestingly recently at his screening for ministerial appointment on the floor of the National Assembly, the new Minister of Finance, Dr. Shamsudeen Usman who was then a nominee and deputy Governor of the Central Bank was alleged by a section of the media to have disclosed that only $8.8 billion (N1.1 trillion) of the reported $43.6 billion foreign exchange reserve is available to the three tiers of government.

In his comment, which was misconstrued, Dr. Usman actually said on the foreign reserve: “There is so much confusion about this. People say we have $43 billion in cash and people think that the same amount of $43.6 billion should be spent. If you break down this $43 billion, about $31 billion or 71 per cent of this amount belongs to the CBN…So; all the three tiers of government have shared this $31 billion and spent the money. The $31 billion of this money is not available for spending. $2.3 billion of that also belongs to the Federal Government. The only amount available in the Federation Account for distribution, which is so-called excess crude, as at this time (July 2007), is about $9.9 billion? And there are some transactions that are in the pipeline, of about a $1 billion…So net; you are talking of about $8.8 billion. That is the amount to be distributed. If you translate that amount into Naira, that is just about N1.1 trillion. Spending this kind of money at such a short notice…all you do is that you will create a smoke of inflation. You will not get much value out of that money. In any case, that has been part of the problem of Nigeria.”

He also disclosed that the country received a net capital inflow of $7 billion (N875 million) and another $8 billion (N1 trillion) as remittances from Nigerians living abroad.

But following the public misconception and confusion over the statement at the National Assembly, the CBN later clarified the position stating that the external reserve as at last month stood at $43.6bn and not the $8.8bn reported by some sections of the media. The Head, Corporate Affairs, Central Bank of Nigeria, Mr. Festus Odoko, said the fact that the new Minister for Finance, Dr. Shamsudeen Usman, said that only $8.8bn remained for sharing did not mean that the country’s external reserves were only $8.8bn. According to him, the $8.8bn referred to the excess crude oil account that was available for sharing.

With that clarification, the question in the minds of many Nigerians is what essentially differentiates the Foreign Reserve from the Excess Crude Account?

Foreign Reserve which is known as Foreign Exchange Reserve is widely defined by economic scholars as liquid assets held by a central bank or government of a country, for use in intervening in the foreign exchange market. This includes gold or convertible foreign currencies, e.g. US Dollars for countries other than the United States, and DM for countries other than Germany. This also includes government securities issued in the above currencies. Monetary reserves are useful both for settling transactions involving foreign counterparties and for undertaking trading in foreign exchange and commodity markets. The larger the monetary reserve, the better the country is able to engage in transactions with foreign countries.

One of the functions of the CBN is to manage the foreign reserve in order to preserve the international value of the local currency. When it issues naira it has to defend its local and external value. The external value cannot be defended without the reserve. It is through this process that the naira has been very stable in the last four years.

In one of his interactions with the media, the Governor of Central Bank of Nigeria, Professor Charles Soludo stated that Nigeria’s foreign reserve, since December 2004 has never gone below $16 billion. As at December 31, 2004, Nigeria’s foreign reserve stood at $16.9 billion, and in spite of the payment of the external debt (Paris Club debt), it has never fallen below that level. By December 2005, it peaked at over $28 billion, and since January 2006, it has never been below $30 billion. In fact, it went as high as over $36 billion before the payment of the Paris Club debt, to exit the external debt trap. And by July this year it was further boosted up to over $42bn.

In defending high foreign reserve, the governor of CBN cited China as an example. He disclosed that China has a per capital income that is a fraction of the per capital income in US and in Europe. China is still by and large a very poor country on per capital basis. But it has almost $1 trillion in foreign reserves and it is still growing. He further disclosed that the level of foreign reserve is a measurement of economic performance and confidence in the economy. It is also bait for foreign investment because investors won’t come in to invest in bonds and the stock market if they see the level of reserve very low. It is a measure of confidence in terms of stability and strength of the national economy.

At a recent Retreat organized by the Central Bank for Finance Correspondents in Ilorin, the officials of the bank informed the participants that the foreign reserve in Nigeria presently has two components: there is the undistributed excess crude. That is after setting a benchmark price for crude export for the year (it was at $35 in 2006 and $40 in 2007). Anything in excess is saved as the excess crude component and there is the naira component, which is being spent within the economy.

The Excess Revenue Account is for revenue derived from Crude Oil Sales, Petroleum Profit Tax (PPT) and Royalties over and above the budgeted benchmark of the Federal Government of Nigeria for each year. There are two types of these excess revenue accounts; the Foreign Excess Revenue Account, which is maintained in the United States Dollar, and the Domestic Excess Revenue Account, which is in Naira.

Mostly the bone of contention, being argued in some quarters, is that the federal government imposes the benchmark on the other two tiers. The Federal Government has actually been maintaining these accounts since 2003 to ensure macroeconomic stability by controlling money supply, mopping up excess liquidity as well as building protective mechanisms against inflation and fluctuations in oil prices.

The excess crude component, part of the foreign reserve, is the part the country earns but yet to be distributed and it is the smaller portion of the total reserve. As the country exports the crude oil, it earns the dollars that are deposited in CBN. The bank has the authority to issue legal tender and in turn credits the federation account with the naira equivalent.

The logic for saving excess crude revenue, according to the CBN is that the oil sector is highly volatile when one considers the past experience of oil boom and reckless spending of the 70s which caused depression around 1978 and forced the country to start borrowing. That incident also ushered in the famous austerity measure and the rate of abandoned projects when the oil price crashed with nothing to fall back on as the country did not save for the rainy day.

Recently, the governors of the 36 states of the federation met and clamored for the release and sharing of the excess crude funds. Since their inauguration, the governors have been mounting pressure on the Federal Government to approve the sharing of the excess crude oil sales as provided by the constitution, saying that it would help them stabilise in their states which treasuries had been looted by some of their predecessors.

According to them, injecting the excess funds into the economy would create job opportunities for the teeming army of unemployed youths in the country. The federal government through the CBN refuses to budge stating that the implication may be disastrous for the economy. Not convinced by the advice from the monetary agency, the governors decided to set up a technical committee on the need for immediate sharing of the funds. The decision of the committee which may include actions to be taken will be announced this month when it submits its report to the Governors’ Forum. A week after their decision, the Central Bank of Nigeria (CBN) also announced that Federal Government has also set up a committee to oversee the management of the nation’s excess crude oil revenue.

The stakeholders may have jettisoned or ignored the constitutional solution to this stark reality of fiscal if not political logjam. The immediate passage of the Revenue Allocation Formula Bill pending before the National Assembly could do the magic as it has answers to the present problem. Once it becomes constitutional through it passage by legislators and assent of President Umaru Musa Yar’ Adua, it will end short-cut to manipulations and intrigues. The Revenue Allocation Bill which has never seen the light of the day since the advent of democracy in Nigeria in 1999 has solutions that could address the current agitation. The proposed revenue formula makes provisions for Special Fund to address peculiar interest of the three tiers of government which require collective efforts. The provisions include general ecology, solid mineral development, mandatory contribution to national reserve (for stabilization), and development of the agricultural sector and management of derivation funds.

But won’t the revenue proposal require adjustments based on the new development to enable it squarely end the quagmire and the current formula that was fashioned during the military era?

This article by Yushau A. Shuaib was originally published in Punch August 7-8, Thisday August 9, New Nigerian August 9-10, Daily Sun August 14, Daily Independent August 16, Saturday Vanguard August 18 and Weekly Trust August 25, 2007


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Yushau Shuaib

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