Posted by By Ndubuisi Ugah on
Lagos State governor, Bola Ahmed Tinubu has been urged to accept the recent pronouncent by the Federal Government to build up reserves as a noble intention, given the fact that it has positive economic implication that would boost the foreign exchange status.
Lagos State governor, Bola Ahmed Tinubu has been urged to accept the recent pronouncent by the Federal Government to build up reserves as a noble intention, given the fact that it has positive economic implication that would boost the foreign exchange status.
Making the call in a statement, an economic expert, Dr. Adedeji Aganga-Williams said Tinubu's position on the issue was subjective, stating that "the reason for building up reserves is to fund the external obligations of the country, such as providing cash backing for export needs of the country and to fund other external obligations against counterpart countries".
He noted that "the amount of foreign currency reserves is used as a measure of credit worthiness by international banks and other international export agency, hence the higher the amount of foreign currency reserves a country has as against the import needs (so called import cover), the higher the credit facilities that is given to the country by international banks".
According to him, it was "as a result this that a country that has high import cover which is usually denominated in months, is usually regarded as capable of financing its export from its earned foreign exchange, hence the international banks gives him credit facilities (which is not usually backed by pledged money) to finance its import and other obligations".
Aganga-Williams, who is positioning himself ahead of the 2007 gubernatorial election in Lagos State, said "the building of foreign reserves saves country the agony of not having to source in advance for foreign exchange to be delivered to the correspondence banks mostly without any meaningful interest accruing to it, in order to finance its obligations, something which is very expensive".
"This usually put the country in a disadvantaged position against other countries and has consequently made Nigeria import transactions more expensive, something which has also adverse effect on the economy i.e. making the importation of goods more expensive. We have witness lately how expensive the importation of fuel is to the country and its accompanied social cost to the country. The extra costs are ultimately borne by the consumers", he said.
He reasoned that "the time to build up foreign reserves is only sensibly and logical when the country foreign exchange is improving and not when its foreign exchange income is dwindling, hence the country has to resort to borrowing again, something which I understand the federal is trying to do away with".
While noting that "this explains why in a more developed democracy and developed economy, the discussion of building up foreign reserves is not centred on whether to build reserves or not, or whether to save or not?", Aganga-Williams stressed that "these things are routinely done by the independent central banks and finance ministry. It also explains why many countries in Europe and in the USA, despite high foreign exchange reserves still run domestic deficit to finance its economy".
"If Governor Tinubu logic is to be followed, why are these countries having deficit (albeit on a short term) and at sane time having foreign reserves?
"The developed economies and democracy understand the difficult relationship between building up foreign reserves and running deficit in the economy that is why the discussion is mostly centred on the government priorities and not to question the government as to why is it necessary?", he added.