February 2022 made it two years since the Federal Government of Nigeria licensed two gold refineries to produce the metal for export and for the Central Bank of Nigeria to hold in its reserves.
The minister of mines and steel development, Olamilekan Adegbite, had said Nigeria expects its mining sector to grow to 3 percent of GDP within the ensuing five years from just 0.3 per cent currently as the government seeks to diversify the country’s economy away from its reliance on crude oil sales.
From every ramification, this development was enlivening as the moribund refineries would encourage diversification to the mining sector, which has been relegated to the backburner of revenue potential for the better part of the country’s economic sojourn.
There is much to gain with gold reserves. For one thing, gold is used to hedge against inflation. Investors typically buy large quantities of gold when their country is experiencing high levels of inflation. The demand for gold increases during inflationary times due to its inherent value and limited supply. As it cannot be diluted, gold is able to retain value much better than other forms of currency.
From a macroeconomic standpoint, the value of a nation’s currency is strongly tied to the value of its imports and exports. When a country imports more than it exports, the value of its currency will decline. On the other hand, the value of its currency will increase when a country is a net exporter. Thus, a country that exports gold or has access to gold reserves will see an increase in the strength of its currency when gold prices increase, since this increases the value of the country’s total exports.
In other words, an increase in the price of gold can create a trade surplus or help offset a trade deficit.
The naira has perennially been vulnerable to wide swings in value. This development, if and when actuated, may be a veritable control tool to stabilize the value of the naira in the future.
Gold has a profound impact on the value of world currencies. Even though the gold standard has been abandoned, gold as a commodity can act as a substitute for fiat currencies and be used as an effective hedge against inflation. There is no doubt that gold will continue to play an integral role in the foreign exchange markets.
To safeguard economic stability in the event of significant fluctuations in the dollar, which currency Nigeria has its reserves, there must be a diversification to a more balanced basket of reserves. A viable commodity that can aid this diversification is gold.
For centuries, the main precious metal used as a reserve has been gold. This is due to its unique chemical specifications which make it unable to react with any element, including acids; and therefore, a valuable store. Nigeria has proven reserves of over 600, 000 ounces of high-grade gold confirmed across ten major sites.
However, the country continues to rely on an external reserve derived mainly from the proceeds of crude oil production and sales; denominated almost wholly in US Dollars. Over 90 per cent of the country’s foreign exchange earnings is from the sale of oil. This makes its reserve balance particularly vulnerable to fluctuations in crude oil prices.
The central banks and treasuries of most developed countries own a significant amount of reserve in the form of a diversified portfolio of foreign currencies, foreign governmental bonds, and precious metals. In consideration of the volatility of Nigeria’s external reserves currency, there is a need for a policy shift by the Nigerian government. Focus should be placed on other stable commodities with more global standard value. Perhaps an external reserve in precious metals such as gold will help lessen the dependency on crude oil and avoid stringent financial policy such as arbitrary restriction of access to FOREX as has been done in the past and continuing.
The United States of America holds about 74 per cent of its total reserves in gold. The only country with a higher percentage of its reserves in gold is one of the poorest in the world, Tajikistan. One might argue that the richest and the poorest in the world hold the majority of their wealth reserves in gold because while one is too large to risk economic failure, the other is too small and frail to similarly risk economic failure. European countries similarly maintain a formula of holding high gold reserves relative to total reserves.
Being the custodian of the country’s external reserves, the Central Bank of Nigeria (CBN) stands in a vantage position to advance the diversification of Nigeria’s reserves. By the provisions of the CBN Act 1991, the CBN is expected to have gold as part of its reserves, amongst other assets. With the statutory powers to maintain a reserve of gold and its statutory responsibility to promote a sound financial system, the CBN, in ensuring that the nation’s external reserve remains formidable, should strongly consider having a gold reserve policy, especially with the opportunity to increase reserves from a domestic source.
There are other advantages of having part of the country’s foreign reserves in gold. Aside from the exponential benefits of having a gold reserve, it does not easily lose value, nor is it easily laundered by those in power. For a country that has grappled with corruption for decades, a shift away from the US Dollar as the sole source of external reserve will create complications for dishonest public officials. Due to the bulk and weight of gold bars and other precious commodities, the nuts and bolts of their looting are more difficult to disguise.
Sadly, two years later, Nigeria seems to be lax about the pursuit of increasing gold production and storage, a move that would have stemmed the free fall of the naira, as well as rising inflation.
