Nigeria’s external reserves get a boost as Euro falls 10% to the dollar

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THURSDAY, 17 JUNE 2010 01:22 BLESSING ANARO


Respite might be coming the way of the nation’s embattled foreign reserves, which fortunes have been nose-diving lately with the appreciation of the United States dollar against the Euro. With the reserves denominated mainly in dollar, the dollar’s good showing portends robust prospects for the economy. The nation’s current external reserve is currently at below $40 billion.



It is expected that the strengthening dollar will help spark a modest rally in the reserves volume which has been subject of scrutiny in recent times when it started dropping off its respectable level of over $60 billion towards the end of 2009.The drop off, as at that period, created so much speculation as to the management of the external reserves. Many had adduced the decline to the increasing funding of the foreign exchange market as well as the re-financing of the troubled financial system. With the current dollar ascendancy, the reserves’ capacity to fund import longer will also be on the rise.



Bismarck Rewane, economist and chief executive officer of Financial Derivatives, echoed this sentiment in his latest monthly report for May, when he said the country’s import from Europe will become cheaper.The implication of having a dominant dollar over the Euro is that goods imported to the country will be relatively cheap. “But more importantly, the fall of Euro will also mean inflation in the country would lower over time if the dollar continues its dominance”, Rewane said. 27 countries in the European Union (EU) accounted for 33.3 percent of Nigeria’s imports in 2008, China followed with 12.8 percent, while the United States was third major exporter to Nigeria, accounting for 8.3 percent of Nigeria’s imports.



The reverse could also be the case for European countries importing from Nigeria. For instance, Euro stat said Nigeria’s export to the 27 European countries accounted for 26.6 percent in 2008. But with a higher export from Nigeria, the odds are in Nigeria’s favour.Another major importer to Nigeria is China, accounting for 12.8 percent of total imports to Nigeria. That is probably why the Central Bank of Nigeria planned to hold some of its reserves in Yuan.



But Rewane, who spoke recently at an institutional conference organized by Zenith Bank, said any plan to have Nigeria’s reserves dominantly in Yuan will further deepen the country’s economic woes.He preferred the reserves be kept in dollars, so that there will not be any unnecessary charges. His views contrast with the Central Bank of Nigeria’s (CBN) position which advocates diversification of holdings, to eliminate what it describes as losses that might occur from increased volatility.



“With the reserves saved in dollar, Rewane said, terms of trade will favour the country. The economy of Euro zone generated a Gross Domestic Product (GDP) of over $16.45 trillion in 2009, according to the International Monetary Fund (IMF), making it the largest world economy. The United States is second with a GDP of $14.2 trillion in the same year. The economist noted separately that Nigeria currently spends $10 billion per year on the importation of fuel. 


(Source:BusinessDay)

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