Why Rising Foreign Reserves Are Not Necessarily Reducing Poverty

The Central Bank of Nigeria (CBN) recently announced that Nigeria’s foreign reserves have risen to US$52 billion. Independent records show that the country had US$35.14 billion in reserves when the current administration assumed office in May 2023.

According to the CBN, the increase was driven by higher receipts from crude oil-related taxes, steady third-party inflows, and stronger portfolio investment inflows. Although the Bank did not provide a detailed breakdown, portfolio investments are widely expected to account for a significant portion of the increase.

This raises an important question:

Why are Nigeria’s foreign reserves reaching record levels while poverty is also deepening?

The answer lies in the quality and purpose of the capital inflows. Broadly, external financing falls into three categories.

*1. Foreign Direct Investment (FDI)*

This is the MTN, NLNG and similar model. Foreign investors bring in their own capital to build businesses, develop infrastructure, produce goods and provide services, earning returns from their investments.

Although FDI is not recorded as government debt, it finances economic development without placing repayment obligations on government. It is generally regarded as the most beneficial form of external financing because it creates productive assets, generates employment, transfers technology and leaves the investment risk largely with the private sector.

*2. Infrastructure or Project-Tied Borrowing*

These are loans tied to clearly defined capital projects such as roads, railways, power plants or other public infrastructure, for example, Sukuk-financed roads.

When transparently managed and invested in economically viable projects, such borrowing expands productive capacity, improves competitiveness and stimulates long-term economic growth. While these loans appear on the government’s balance sheet, they create assets that can generate lasting economic benefits and repay the loans.

*3. Portfolio Investment (“Hot Money”)*

This involves attracting foreign investors into Treasury Bills and government bonds by offering high, often double-digit, interest rates.

These inflows increase Nigeria’s foreign reserves and are frequently celebrated as evidence of improved macroeconomic stability. However, they are generally short-term investments with maturities ranging from 30 days to one year.

Unlike FDI or infrastructure financing, portfolio investments do not build factories, roads, power plants or other productive assets. They create few jobs and contribute little to expanding the productive capacity of the economy.

When these investments mature, government must repay both the principal and the interest, placing additional pressure on public finances. If investor confidence weakens, these funds can also leave the country as quickly as they arrived.

This explains why Nigeria can simultaneously record rising foreign reserves and rising poverty.

If a significant share of reserve accumulation is driven by short-term portfolio inflows rather than productive investment, higher reserves do not necessarily translate into higher incomes, more jobs or improved living standards.

By contrast, if external capital is channelled into infrastructure and productive sectors that expand domestic production, increase exports, create employment and raise national productivity, then higher foreign reserves would reflect genuine economic strength rather than temporary capital inflows.

In such circumstances, rising foreign reserves would be accompanied by rising incomes, stronger industrial output and a better standard of living for Nigerians.

Foreign reserves are undoubtedly an important indicator of macroeconomic stability. However, the source of those reserves matters just as much as their size. Sustainable prosperity depends not merely on accumulating reserves, but on ensuring that external capital is invested in assets that expand the productive capacity of the economy.

Government would achieve more sustainable results by expanding production and earning foreign exchange organically, rather than relying on short-term “hot money” to boost reserves.

The low-hanging fruits are obvious: Why are we producing less than 2 million barrels of crude despite our installed capacity? Why are we supplying only about 5,000 MW from over 13,000 MW of installed power capacity? Why are our steel plants idle? Why aren’t farmers back on their farms with modern mechanised agriculture?

Increasing domestic production would reduce imports, expand exports, create jobs and grow foreign reserves naturally. That is the sustainable path to prosperity, not dependence on short-term capital inflows.

I hope this provides useful context to the discussion. Nick Agule (nick.agule@yahoo.co.uk) is a publicaffairsanalyst