Thread by @femolevsky

As per Foreign Reserves, it is the foreign "EXCHANGE" balance of the Naira spent, from $, £ or € (foreign exchange) earned from Exports including exports of financial assets.

THREAD.

Nigeria benchmarks $44 per barrel in the budget. But crude sells for $60 per barrel on the market. Nigeria earns $60 on a barrel, takes $44, goes to CBN to exchange for Naira, then splits that $44 between the 3 tiers of government, FG, states and LG in Naira terms.

The money exchanged, now with the CBN is domiciled, stored, credited or recorded in the Foreign Reserves account. Now, if you, a citizen needs to buy a TV from China, you pay for it through your bank. However, your bank has to go to the CBN to get the $ equivalent to pay to china

That $ equivalent is debit/deducted from the Foreign Reserves balance. Also, if your state government goes to buy a ship from Korea, they have to take their Naira, from FAAC or IGR to the CBN, to get dollars, which comes from the Reserve/initial $44 deposited.

If DMO goes to Europe, to sell financial assets; Bonds (e.g.: Eurobond). That money gotten from the sale of bonds is converted to Naira at the CBN before handing over to FG to spend on its intended use, through the Federal Ministry of finance.

Now, if you decide you want to be buying imported petrol, at N67 per litre, at your local filling station, because Nigeria does not produce PMS, they have to import it. Landing cost of pms is > N200 per litre. The balance you are not paying has to be paid by someone.

That balance is called "subsidy". Even if we were producing fuel locally, because the benchmark price of crude oil is at $44, PHRC will still in-take crude oil at $44pb equivalent in naira. Thus will produce petrol per litre at a higher cost than N67.

Someone still has to pay that subsidy to ensure you buy it at a lower rate. In this instance, FG can pay subsidy in naira terms and not $. They will have to get that money from somewhere else. But as it stands today, they pay $ from the reserves. Assuming no ECA.

Now, imagine oil at $100 per barrel. We have an "excess crude account" where monies in excess of budgeted benchmark is kept. Remember $60 vs $44? That $16 balance is kept in the ECA, on behalf of FG, State and LG. The trio are collectively called FEDERATION.

The federation then decides at $100 crude price to import PMS for the citizens; you and I, to sell below landing cost of > N200. Say at N145 per litre. It means the federation has to cover the balance of > N55. This, they then pay, using the $ in the ECA.

The ECA is not a constitutional account, this was established by states vs FG case at the Supreme court. Therefore, that money must either be shared, or held in joint agreement btw all parties of the federation, including LG.

So, whatever money you find in the "rising" reserve, is money already spent! The fact that it is rising does not mean you have more money, it just shows you have a strong/positive International Trade balance. You can meet your foreign exchange obligations.

If Nigeria exported exactly the same quantity of products, as imported, the reserve will remain unchanged. But when the latter is in favour of exports, it rises. Unfortunately for Nigeria only happens with rising prices of Crude oil.

If we get other sources to push exports, such as agriculture, entertainment, IT, machinery, mining or intellectual property, and encourage local spending, through, property rights, security, laws and speedy dispensation of justice, Nigeria would earn more $ into our reserves.

Also, if we reduce our dependence on foreign made goods, including PMS, by paying the full landing cost, no subsidy, or increasing the pump price, as this government did, our reserves balance will rise. If we also export more financial assets, through borrowing.....

.....our reserves will also rise, but when the chicken comes home to roost and it's time to pay up, "banbi allah" or "please, in the name of god" will not help.

Be wise!

Get your PVC!!

God Bless Nigeria.

END!!

The ECA houses monies in excess of budgeted benchmark pricing. It is held on behalf of the Federation. When federal government pays subsidy, unilaterally, it does so in breach of the other ECA contributors; states and LG.

Imagine owning a joint account with your 2 friends. Everybody contributes, but because you are in charge of buying friday night drinks, and the prices went up, you decided to unilaterally spend from the joint account, what will happen? Fight!

Same here. Fight has broken out between FG states and LG. But because FG is Man utd and states - man city, LG - Chelsea, Man Utd remains boss! Spending as they like, buying Sanchez. States and LG can only vex.

That's why when crude prices are higher, ECA is spent on subsidies, rather than reserves, so that our currency stays stronger, rather than tumble. When prices tumble, earnings dwindle, reserves suffer, currency depreciates. This is why Kachukwu had to fight for production cuts.

Kachukwu did this through Nigeria's membership at OPEC. Lower supply, same demand, higher prices, stable Nigeria.

Borrowing more money, to shore up reserves is not an achievement, getting more avenues to earn FX is. Reducing spending on foreign goods, through restrictive, but 'local production' stimulating policies also is the way to go. Not policies that stifles local production and GDP.