The $67 Billion Foreign Reserve Legacy (1)

We should be celebrating economic development, not huge foreign reserves.

Speaking at University of Nigeria’s convocation on January 24, 2013, Mrs. Obiageli Ezekwesili made the following allegations: “…the squandering of the significant sum of $45 billion in Foreign Reserve Account and another $22 billion in Excess Crude Account being direct savings from increased earnings from oil that the Obasanjo administration handed over to the successor government in 2007. Six years after, the administration I served handed over such humongous national wealth to another one, most Nigerians, especially the poor have, continued to suffer the effects of failing public health and education systems as well as decrepit infrastructure and battered institutions. One cannot but ask what exactly does this level of brazen misappropriation of public resources symbolize? Where did all that money go? Where is the accountability for the use of these resources and the additional several hundred [billions of] dollars realized from oil sales by the two administrations that have governed our nation in the last five years? How were these resources applied or more appropriately misapplied? …”

She was alleging, therefore, that late President Yar’Adua and President Jonathan administrations collectively ”squandered” $67 billion ($45 billion foreign reserve account and $22 billion excess crude account). This is besides hundreds of billions received as oil revenues during the past five years in office. She made three serious indictments here. First indictment was that former President Obasanjo left whopping $67 billion in foreign reserves for his successors. Second indictment was that Yar’Adua and Jonathan administrations squandered that money in addition to billions of oil revenues accruing to them. Third indictment was that because of ”squandering” public funds, ”poor Nigerians have suffered the effects of failing health and education systems as well as descript infrastructure and battered institutions.”

Very serious allegations, not only because here is a country where most corruption allegations almost always are true. It’s more so because raising the social consequences of wasting public funds, it cut deep into the hearts of the suffering masses of Nigeria. That Mrs. Ezekwesili talked passionately as someone on the side of the poor shouldn’t be in doubt. And that her speech echoed patriotic citizenship too shouldn’t also be queried, especially given how the kind of voice it was expected to give to voiceless millions of Nigerians. In fact, by demanding accountability and prudence in how government manages public resources, Mrs. Ezekwesili sounded like Nelson Mandela, arguably the most honest living African leaders. But before applauding her, let’s not only interrogate the veracity of her allegations, but also the motive for making these allegations now.

Given what we all know about the Obasanjo administration, should we agree with her that that Obasanjo should be someone to be looked up to by Jonathan as his role model, or someone he should distance himself and government from? I leave this judgment for fellow Nigerians to make. By accusing Jonathan to have squandered public wealth, no doubt, she was making us believe that Obasanjo displayed more probity and prudence with public money. That she has such full belief that today the country’s education and health systems as well as infrastructure decay are worse than what they were under Obasanjo was what most Nigerians couldn’t understand how she could say that. If we should call a spade a spade here, how come the Obasanjo administration left the country in such darkness for eight year, generating below 2,000 megawatts, while Jonathan even though has not brought us out of darkness, now generates 4,500 megawatts within three years in office?

But before we examine her $67 billion allegations, let’s first find out why she made these allegations now and also why choosing a university’s convocation.

Mrs. Ezekwesili has never seen anything wrong with these two administrations until President Jonathan recently parted ways with Obasanjo. Little wonder, looking for the appropriate opportunity to give it to him for daring to disagree with Obasanjo, she couldn’t find a better place to do that than UNN convocation. But would she have made these inconceivable allegations against her political godbrother were things still going smoothly between Obasanjo and his political godson? Of course, it would have amounted to taboo.

But even given the situation, should she have used such unpolished language as, ”squandering and brazen misappropriation of…national wealth”? That is, should such an accomplished role model to millions of young African women have to be so straightforward? In any case, it’s UNN authorities to blame for not making efforts to filter such important speech, bearing in mind that after all, a convocation speech, rather than for political campaigns against political opponents, is always about advising graduating students about the real world out there. With the drama her speech at UNN has caused, it is possible that most universities in the country that want to avoid controversy should begin to avoid having her as their speaker.

Before continuing, let me make it clear here that I’m a well-known critic of this government the same way I was to Obasanjo’s. Anyone in doubt should just Google my last 20 articles. But I have never done so out of hatred. I don’t detest any Nigerian President, but only criticize them for their insensitivity to the plight of the Nigerian people. In the case of Jonathan administration I’m only against the slowness of the government, and particularly against the mercenary-behavior of most members of his cabinet.

In the case of Oby, she is like a sister to me since we met in Cambridge Massachusetts in 1999 and took Professor Jendai Fraser’s course at Kennedy School, Harvard. But it’s because we are so close that I really want to give it her, so that she knows that politics stinks and she should not have joined our uncultured, intolerant, and quarrelsome politicians in their politics of mud-throwing. In short, I’m writing this to ensure that never again should she ever talk without first crosschecking her facts. Yes, the truth is bitter; we all know it is. Having clarified my intentions here, let’s now proceed to determine the veracity of her $67 billion accusations.

Foreign reserves, otherwise known as foreign currency deposit accounts, comprising of national foreign assets, bonds, gold, and Special Drawing Rights (SDRs), are held on behalf of a country by its central bank and/or its monetary authorities. Besides being a store of value to accumulate excess wealth for future consumption purposes, nations (mostly developing countries) hold foreign reserves to safeguard the value of their domestic currencies as well as to timely meet international payment obligations. In a flexible exchange rate regime (dirty float regime like ours), foreign reserve assets are used by the central bank to purchase the domestic currency, which as a liability to the bank since it prints local currency, needs foreign reserves to stabilize the value of local currency.

In the case of Nigeria, foreign reserves are made up of three components — the federation, the federal government, and the CBN portions. The federation component is made up of excess crude and royalty accounts, where are only shared (used) as the need arises. In the case of federal government component, it is made of up funds belonging to some agencies of government, such as NNPC for its Joint Venture funding. The CBN portion is made of up monetized (government shared) funds. The funds are dollar inflows, which the CBN receives and keeps on behalf of the three tiers of government; and the CBN purchases the proceeds and places the naira equivalent into the federation account. As soon as the foreign exchange is monetized — that is, naira equivalent given the three tiers

of government, the money in the foreign reserve accounts becomes practically CBN’s. This it uses in conducting its monetary policy, in defending the value of the naira from time to time. And should government want any foreign currency from the CBN, like any other foreign currency user, government should have to provide the CBN the naira equivalent.

Since every year, federal government sets oil price benchmark; an oil price forecast for that year’s budget revenues, based on this oil price benchmark, government receives naira from the CBN for the dollar receipts on prevailing exchange rates (naira per dollar). Based on the stipulated benchmark, the Federation Accounts Allocation Committee (FAAC) sits monthly to share the monetized revenues. It is what is above the benchmark that is kept by the CBN in the Excess Crude Account, owned by the three tiers of government. It is the federal government’s share of the money from FAAC that gets distributed among the MDAs as stipulated in that year’s budget as approved by the National Assembly.

Ezekwesili’s colossal mistake was the mixing up of the excess crude account (which still belongs to the three tiers of government) with the foreign exchange reserves which having already been monetized and shared by the three tiers of government now belongs to the CBN. In other words, she has failed to appreciate that as soon as the CBN monetizes the oil revenue inflows, by giving government the naira value of the generated revenues, practically the foreign currency held in foreign reserve accounts now belongs to the CBN, not to government.

As for the excess crude account funds she was referring to as $22 billion, actually it was $20 billion as CBN records show. But even if we agree that it was $22 billion, with the excess crude account belonging to the three tiers of government, it’s impossible for the federal government to dip its hands into it without involving its co-owners. Let’s not forget also that major part of the account was used to meet up shortfalls in oil revenues caused by the 2008 global financial crisis, which also plugged global oil prices.

And given the huge infrastructure gap caused particularly in power due to Obasanjo’s failure to invest in the country’s infrastructure during his eight years in office, Jonathan, getting to power, entered into an understanding with the states and local governments to spend the ECA money on key infrastructure, particularly on gas master plan with the goal of ensuring steady gas supply to the power stations, which with sustained supply has increased power wattage in the country. …To be continued. Enwegbara is a MIT educated specialist in money and financial matters.