How Nigeria can grow foreign reserves, fix economy

How Nigeria can grow foreign reserves, fix economy

There is a template as to how nations grow their foreign reserves. The model may defer but the mechanisms are often similar.

 

Economists and policy experts agree that reserves are to nations what bank savings are to individual citizens. Without savings, individuals will go bankrupt and begging for crumbs at some point in the future.

 

Foreign reserves are “assets denominated in a foreign currency that are held by a nation’s central bank,” according to Investopedia, an online financial dictionary.

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Some are held as foreign currencies (dollars, euros and pounds) while others are in the form of bonds, treasury bills, and other government securities.

 

Most reserves are held in US dollar because it is the most traded currency in the world and provides buffers in situations of market shocks or currency devaluations.

 

Economists point to Vietnam, a Southeast Asian country, as an example of how nations can grow their reserves and guard themselves against recurring global economic crises. It may well be reasonable to recommend studying the Vietnamese economic model to present and future Nigerian political office aspirants.

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Like Nigeria, Vietnam is largely agrarian. Like Nigeria too, it fought a war, but theirs was longer. The 20-year-old war brought the country to its knees, and, according to the World Economic Forum’s Peter Vanham, “per capita GDP was stuck between $200 and $300.”

 

However, there was a determination to change the fortunes of the country after the introduction of ‘Doi Moi” renewal campaign which transitioned the nation from a centrally planned economy to market socialism. The latter politico-economic philosophy combined central planning with free market incentives and opened a previously closed economy to international participation.

 

According to the International Monetary Fund’s Working Paper entitled, “Vietnam’s Development Success Story and the Unfinished SDG Agenda 1” and prepared by a researcher, Anja Baum, “Doi Moi dismantled the largely planned economy (beginning with agricultural reforms), opened a closed economy to international markets and trade, and initiated pro-business reforms. Doi Moi was accompanied by a wide-ranging social agenda, led by expansion of education and electricity, with a clear goal of ‘leaving no one behind.’”

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Based on the analyses by World Bank and Brookings Institute’s economists, there were three decisions taken by Vietnam that made it a shining example for emerging markets.

 

Vanham of the World Economic Forum identified these three steps. “First, it has embraced trade liberalization with gusto. Second, it has complemented external liberalization with domestic reforms through deregulation and lowering the cost of doing business. Finally, Viet Nam has invested heavily in human and physical capital, predominantly through public investments.”

 

The Doi Moi economic model opened up for foreign direct investment, providing incentives for companies willing to invest in the country. Raw materials were available, taxes were low, tariffs were designed to favour local investments and tax holidays were also provided. It was easier to get licenses and laws were made to punish official demanding bribes to provide basic infrastructures for investors. Also, basic infrastructures were provided and investors perceived the country as low-risk. More importantly, factories met skilled manpower as the citizens were also learned.

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But the local manufacturing sector was not left out. Manufacturers were provided with incentives to produce and their target was basically the export market – to create jobs and earn the foreign exchange.

 

The policies paid off. The value of Vietnam’s exports in 2021 was $336.31 billion, according to the country’s Customs Department.

 

Nigeria earned $45.56 billion from crude and non- oil within the same period, according to the NBS’ Foreign Trade Statistics. Crude oil made up over 76.22 per cent of this amount, while the non-oil was 23.78 per cent. Non-oil exports were around $10.836bn.

 

But Vietnam earned $58 billion (more than Nigeria’s crude oil and non-oil) from export of phones and accessories by the end of 2021. The country’s biggest export products were electronics, followed by coffee, textiles and rice.

 

In 2021, the Asian nation exported textiles and garments valued at $39 billion, representing a four per cent growth from 2022’s figure.

 

It made almost $11.8 billion from exporting textiles and between January and April 2022, up 21.6 percent from the corresponding period in 2020, according to the country’s Ministry of Industry and Trade.

 

The growth has also been inclusive. According to the IMF, the Southeast Asian country’s growth model transitioned it from low-to middle-income country and lifted 40 million people out of poverty.

 

The foreign reserves benefitted from these economic changes, reaching $110 billion by the end of 2021, representing a 10-fold increase over the amount reported in 2010.

 

Nigeria’s foreign reserves have hovered between $38 billion and $39 billion in the last one year – 35 per cent of Vietnam’s reserves.

 

Nigeria’s population is 206 million (2020) while Vietnam’s is 97 million (same year).

 

On the other hand, South Africa, Africa’s second largest economy after Nigeria, grew its foreign reserves to $60.28 billion by end of April 2022 (when it last reported it) from $57.589 billion recorded by end of December 2021.

 

By the same period, Nigeria’s foreign reserves stood at $39.579 billion, having declined by 2.3 per cent from December 2021.

 

“If you do not want your foreign reserves to decline, then do more exports,” said Professor of Economics and former Assistant Director of the Central Bank of Nigeria, Jonathan Aremu.

 

“Then, a big question arises, for an economy with foreign exchange challenges and declining foreign reserves, where do political party candidates get dollars to spend in an economy that uses naira?”

 

Aremu explained that Nigeria’s foreign reserves would keep dropping when more dollars were spent to pay for imports while foreign exchange earnings from exports kept dropping.

 

Data show that Nigeria is an import-dependent and consuming nation. In 2021, the value of Nigeria’s total trade stood at N39.751tn, but total imports stood at N20. 843 trillion while exports were valued at N18.907.79tn. However, over 70 per cent of the exports were made up of crude, which was shipped abroad, refined and re-imported.

 

South Africa’s manufacturing sector contributed 11.74 per cent to its GDP in 2020, according to the World Bank, but Nigeria’s hovered between 8 and 9 per cent that year, according to the NBS’ data.

 

In 2020, SA’s exports were around $102bn, making it 36th exporter in the world. Though it is also a commodity-driven economy, it is also big in finished products.

 

“Foreign reserves growth is just about producing more. We are not exporting enough. When we produce, we export. That is the only way to grow reserves,” Managing Director/ Chief Business Officer, Optimus by Afrinvest told The Punch.

 

He explained that Nigeria either had to reduce its spending on import or begin to make stronger efforts to earn foreign exchange to support its economy.

 

In a recent interview, President of the Manufacturers Association of Nigeria, MAN, Mansur Ahmed, told The Punch that it was unfortunate that Nigeria was not reaping the benefits of oil price rise, which could have strongly supported the foreign reserves, flagging oil theft as a serious challenge which must be confronted by the country.

 

Nigerian manufacturers are hard hit by high cost of energy (diesel and gas), foreign exchange crunch, high cost of funds and poor infrastructure.

 

More than 50 Nigerian manufacturing companies have shut down in the last five years, according to recent investigations by The PUNCH.

 

In the same period, two of the biggest manufacturing companies that closed down their manufacturing plants are Procter & Gamble and GlaxoSmithKline.

 

In 2014, Procter & Gamble, also known as P&G, set up a $300 million diaper plant at Agbara, Ogun State. But three years later, the plant was shut down due to what the company described as “restructuring”.

 

Similarly, GSK Nigeria closed down its drug manufacturing plant at Agbara, Ogun State, in the third quarter of 2021, and moved into a contract manufacturing alliance with Fidson Healthcare.

 

Some of the manufacturers, whose firms were shut down, blamed the demise of their firms on the foreign exchange policies of the Nigerian government and the poor operating environment.

 

The Chief Executive Officer of Kenfrancis Frams, one of the moribund firms, Mr Ifeanyi Okereke, told The PUNCH that his agro-based company was shut down due to the foreign exchange crisis bedeviling the industrial sector.

 

He said,” We started in 2016, believing in Nigeria and hoping that we could process agro products and export. But getting raw materials to carry out this objective became a problem. Our cost of production skyrocketed and, at a point, it became clearly impossible to continue operations.”

 

He noted that many more industries had shut down because of the foreign exchange crisis and poor industrial plan.

 

He said, “Your cost of production as a manufacturer or agro processor can only continue to rise because you pay heavily for energy, water, logistics, port demurrages and then source your foreign exchange from the black market at over N570/$. Why then would you survive?”

 

Apart from being an import-dependent country, Nigeria’s main exports are raw materials and agricultural products, which bring in lower earnings for the country and serve the factories in the United States, Europe and Asia. For example, Nigeria’s animal skins and hides were mostly patronised by Italy, China, and Spain in 2021.

 

In the fourth quarter of 2020, Nigeria exported raw hides and skins, including locally-made shoes, valued at N25.350 billion but imported shoes, animal skins and other types of footwear estimated at N93.118 billion.

 

In the third quarter of 2021, Nigeria exported raw skins, hides and furskins worth N36.161 billion (year-to-date) but imported shoes and other leather products valued at N83.521 billion.

 

“If you want to earn more money, then you have to add value before you export. You can earn three or four times more when you add value,” said Chief Executive Officer of an export firm Agroeknor, Attah Anzaku.

 

According to MAN, energy takes up 40 per cent of their expenditure.

 

Odinaka Anudu

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