Nigeria: Analysts Back Afreximbank's Push for Foreign Reserves Domestication

18 September 2019

Economic experts have supported the push by the African Export and Import Bank (Afreximbank) to mobilise part of the foreign exchange reserves of African central banks to fund viable trade and project ventures in Africa under its Central Bank Deposit Programme (CENDEP).

They described Afrexim-bank's efforts, which has yielded $8.824 billion so far, as a welcome development, saying that it does not make economic sense for African countries to keep their reserves in foreign countries and go there to borrow the same reserves as external loans, with interest.

CENDEP, which promises favourable returns on deposit, is meant to expand capacity in financing the exports in participating countries.

It would also enable the Cairo-based Afreximbank to provide term loans in support of value added exports in CENDEP deposit holding countries.

In addition, CENDEP would contribute to ongoing efforts at improving regional trade and integration of African economies by using the programme to support intra-African trade flows.

The Afreximbank's Director and Global Head, Communications & Events Management, Mr. Obi Emekekwue, told THISDAY that 18 African countries have keyed into the programme that has mobilised $8.824 billion.

Emekekwue said: "The bank started the programme with the aim of mobilising part of foreign exchange reserves of African countries that are traditionally held with the banks outside of Africa. These funds thereby, by virtue of being held outside of the continent, circulate in the developed countries and in so doing help promote the development of those countries at the expense of the continent. (Moreover) Countries from Africa pay huge premiums whenever they seek to raise funds in the international markets even though their FX reserves form part of those funds."

"All member states where we currently do business with benefit from CENDEP. We operate a pool arrangement of liquidity management where we pool all funds that we raise to fund assets into one pot. The funds mobilised into the treasury pool funding are used to finance trade and trade-related financial transactions. The CENDEP funding is short term funding with maturity of up to 12 months and as such cannot be used to finance long-term transactions."

Emekekwue also said there were several challenges facing the CENDEP mostly around risk and return.

"While most central banks support the initiative and have shown willingness to participate, they remain constrained by internal reserve management processes and procedures. Although the bank is rated invested grade by Moody's, GCR and Fitch, the rating is still considered to be on the lower side by most central banks investment policy guidelines thus limiting the participation by some central banks.

"Other challenges include the yield demanded by other African corporates is sometimes very high compared to cost of raising funds from other international loan markets. However, the progress made so far shows that most African entities are appreciating the work of the bank and are fully in support of the initiative," he added.

Executive Chairman and Founder of Phillips Consulting Limited, Mr. Foluso Philips, welcomed the innovation of repatriating parts of African foreign reserves held outside the continent as a great idea.

"It is a painful thing when a lot of foreign exchange reserves that we know we need are kept outside the continent. The idea that African central banks should pool their money and hold it is one I certainly support. We should not be going outside to be 're-borrowing our money even at good interest rates.' All the grants Europe are giving us are actually our money if you consider how much stolen money from Africa that is in their banks. We need the money and should bring them down to Africa. Let them bring back the money and build our infrastructure. How can we be funding countries that can buy us a million times over? That is what we are doing (by leaving our governments' foreign reserves and individual wealth abroad)," he stated.

Professor of Finance, University of Lagos, Wilifred Iyiegbuniwe, viewed the concept of CENDEP as a welcome development.

"We have to look at what is the purpose of foreign reserve and if you bring it home will it still serve that purpose. I think the whole idea of foreign reserve does not mean basically that it must be held in foreign countries. We are actually empowering the developed countries coupled with the stolen monies stashed away by our politicians. It works for them and helps to grow their economy because they are not sterilised. Then you turn round to take loans in these foreign countries. It becomes double jeopardy because it is the money we took to their banks as foreign reserves that they are giving us back as loans.

"So, it is a good idea. It is also a noble initiative. But one has to sound a caution because the safety of these funds is very critical. What I can suggest is that we take a portion for a start and then experiment how it goes.

"The programme should be guided because the countries where the reserves were kept might try to sabotage this move. It will require the resolve of the governments in Africa to sustain," he said.

Iyiegbuniwe also suggested that aside from trade, African reserves should be brought home to execute infrastructural projects that would grow the economies of countries in the continent.

Another Professor of Finance in the University of Lagos, John Emeka Ezike, said: "The management of foreign reserves is based on a number of factors: stability of the value and returns on assets as central banks take portfolio concept of reserve management. That is why central banks diversify their reserves and sprayed them across geographical zones. So that collectively the value would be reserved. That is where I see the CENDEP programme. It will be one of the elements of portfolio diversification in reserve management. But it will be appriopriate for the Afreximbank to justify its demand in a comparative study on returns in assets put side by side in other market centres in Europe, Asia and America and the one it is proposing so that the central banks will see how it benefits them."

However, the Chief Executive Officer of Economic Associates, Dr. Ayo Teriba, described CENDEP as a pipe dream because of scarcity of foreign exchange reserves in Africa.

He said: "One of the problems of African economies is that they are illiquid. They don't have money. Only about seven out of 54 African countries have reserves of $17 billion or more. So, imagine where the money will be mobilised from?"

Teriba expected the Afreximbank to teach African countries how to earn more foreign exchange by opening their economies to foreign direct investments.

"The bank should teach African governments how to get their citizens in diaspora to send money home at real market value.

"In addition, you get FDI by offering foreigners something of value to buy, which may be government corporations or properties and it must involve transfer of ownership. Nigeria, for instance, can get foreign exchange to develop its infrastructure by repeating the models it used on the Nigeria Liquefied Natural Gas and the liberalisation of the telecoms industry on the rail, transport and the energy sectors," he added.

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