Aside using Nigerias foreign exchange reserves to sustain the value of the naira from collapsing against the United States dollar, the Central Bank of Nigeria on Tuesday gave other possible reasons that could lead to a fall in the reserves.This follows concerns by stakeholders on the recurrent decline of the reserves, a development which they described as unhealthy for the financial system. Findings by our correspondent from the apex bank showed that the reserves moved up to $34.599bn on October 14, but commenced a 14-day free fall to close at $32.821bn on November 2, 2011.The bank noted that it occasionally used the forex reserves to manage the exchange rate, in addition to enabling an orderly absorption of international money and capital flows. In a paper titled "Overview of the Nigerian Exchange Control Regulations," the Deputy Director, CBN, Mr. Dipo Fatokun, explained that the forex reserves were used by the monetary authorities to control money supply as well as achieve a balance between demand for and supply of foreign exchange through intervention, by either offering to buy or sell foreign currency to banks in the forex market. He said, "When CBN sells forex to commercial banks, its level of reserves declines by the amount of the sale while the domestic money supply (in naira) also declines by the naira equivalent of the sale. "Conversely, when the CBN purchases forex from the banks its level of reserves increases while it credits the accounts of the banks with the naira equivalent, thus increasing the domestic money supply." According to Fatokun, the forex is also used for timely meeting of international payment obligations. He noted that the need to finance international trade had led to demand for liquid reserves that could be used to settle trade obligations, like in the payments for imports."While this is typically done through commercial banks, in many developing countries, including Nigeria, the central bank actually provides the forex through auction sessions at which authorised dealers buy foreign exchange on behalf of importers," he said."In industrialised countries where the manufacturing sector produces for export markets, the transaction need for holding reserves is less important," Fatokun added.He stated that forex reserves were mainly to safeguard the value of the domestic currency and that the reserves were held as formal backing for the local currency.On the exchange rate policy in Nigeria, he said, "the main objectives of this include to preserve the value of the domestic currency, maintain a favourable external reserves position and ensure external balance, without compromising the need for internal balance and the overall goal of macroeconomic stability. This objective has the backing of the law."
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