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STRENGTHENING THE NAIRA THROUGH PARTIAL GOLD RESERVE AND GOLD SOVEREIGN WEALTH FUND: A CLARION CALL TO MONETARY AUTHORITIES

Long before now, countries use to have gold standard, where currency value was tied to gold. But most don’t anymore, Nigeria isn’t on gold standard, and so maybe, they can use their gold reserves to back the Naira partially. So how can this be done exactly where gold reserve is practically none existence.

There would be need to formalise the gold miningsector. There are lots of artisanal mining in Nigeria, which is informal, so in formalising this sector, the government through the CBN would need to initiate a policy to buy and mine gold to build reserves, this can be done by licensing miners, providing support in terms of technology and buying from abroad from well established refineries.

Establishing a sovereign gold fund, this would enable the central bank of Nigeria to buy gold from the local miners and hold it as reserves. This could be used to back the Naira thereby bring back investors’confidence in the Naira, by either buying or selling in the forex market so that the demand for the Naira would increase and would be more competitive in increased demand and value.

Investing in gold mining infrastructure and gold refining technology would boost production thereby resulting in added reserves, the government can further encourage Public- Private Partnerships thereby attracting foreign investment and incentives.

Build a robust legal frame work, create laws to regulate gold mining, prevent illegal exports and offer the central bank the option of first refusal in the purchase of refined bars. The government can also ensure that a particular quantity of mined and reserve gold goes directly to the central bank of Nigeria reserves both as a sovereign gold fund and partial back up for the Naira.

Promoting transparency and certification. This can be done by promoting ethical sourcing, leave behind a paper trail and a stamping mark to identify the source of such gold. This would make the Nigerian gold more attractive in the international market. Certification from the London Bullion Market Association (LBMA) standards. That would require audits and proper documentation.

In building the Naira into a strong currency of choice, the gold reserve can be used for monetary policy. If the CBN holds more gold, it can be used to back bond issuances or collateral for loans. This would definitely improve credit ratings and lower borrowing costs. During inflation or volatility in the economic indices, having  gold reserves can provide a hedge, as gold most times retains value when currency depreciates.

Creating public awareness and stakeholders’collaboration is required where miners, local communities and businesses need to be on board. These are critical stakeholders to avoid resistance or illegal mining.

Refining gold locally should be a critical component by collaborating with other countries or international organisations for technical assistance and critical components in the refinery. Values added in local refining and retained profits can be added to the reserves.

It is important to note that converting gold to reserves and partial gold backing on the currency has a direct effect on the value of the Naira in the following ways;

i. If the CBN holds more gold, it can use that to intervene in the forex market, for example, selling gold for foreign exchange which can be used to boost the value of the Naira.

ii. Backing the Naira with partial gold reserve would boost investors’ confidence and that too would accentuate other Exchanges quoting and trading in the Naira.

iii. Partial backing of the Naira in gold would help its value and acceptability in all ramification, goods and services in other countries would be denominated in the Naira.

iv. While it is a complex process of moving into gold standard-backed currency and this might not seem feasible, partial backing or using gold as part of the reserve would help assist the local currency find its real value and bring about stability.

v. Inflation as a factor erodes the value of the Naira, strengthening the Naira through partial gold backing would make imports cheaper, thus reducing inflation.

In summary, these are the steps that could be taken to strengthen the Naira through gold reserve and partial gold backing:

1.Formalise and Regulate the Gold Mining Sector

  - Licensing and Support: Formalize artisanal mining through licensing, providing technical and financial support to miners. This increases legal production and reduces smuggling.

  - Anti-Smuggling Measures: Strengthen enforcement at borders and mining sites to curb illegal exports. Implement penalties for non-compliance.

2. Establish a Sovereign Gold Reserve

  - Central Bank Purchases: The Central Bank of Nigeria (CBN) should buy domestically mined gold at competitive prices to build reserves. This reduces reliance on foreign exchange and stabilizes the Naira.

  - Gold-Backed Financial Instruments: Use gold reserves as collateral for international loans or to issue bonds, enhancing creditworthiness and reducing borrowing costs.

3. Invest in Mining Infrastructure

  - Public-Private Partnerships (PPPs): Attract foreign and domestic investment in mining technology and infrastructure. Offer tax incentives to incentivize participation.

  - Local Refineries: Develop domestic gold refineries to add value, reduce export of raw ore, and retain higher profits.

4. Legal and Policy Reforms

  - Mandatory Domestic Sales: Require miners to sell a percentage of gold to the CBN, ensuring reserves grow. Ghana’s model, where the central bank purchases local gold, offers a template.

  - Transparency Frameworks: Enforce ethical sourcing certifications (e.g., LBMA standards) to boost global market access and pricing.

5. Monetary Policy Integration

  - Forex Stabilization: Use gold reserves to intervene in forex markets, selling gold to bolster foreign reserves and defend the Naira during volatility.

  - Inflation Hedge: Leverage gold’s stability to mitigate inflation risks, as gold often retains value during currency depreciation.

6. Stakeholder Engagement and Transparency

  - Community Involvement: Engage local communities and miners through education and inclusive policies to reduce illegal mining and foster cooperation.

  - Blockchain Tracking: Implement technology like blockchain to trace gold from mine to market, ensuring transparency and reducing leakage.

7. International Collaboration

  - Technical Partnerships: Collaborate with international bodies (e.g., World Bank, IMF) for technical assistance and investment in mining infrastructure.

  - Global Market Integration: Position Nigerian gold in international markets through certifications and partnerships, enhancing demand and pricing.

8. Diversification of Reserves

  - Reduce Oil Dependency: Diversify foreign reserves by increasing gold holdings, reducing vulnerability to oil price shocks and enhancing economic stability.

Challenges and Mitigation

- Corruption: Strengthen anti-corruption agencies and enforce strict oversight in mining and reserve management.

- Funding: Utilize PPPs and international loans focused on mining sector development.

- Security: Deploy security forces to protect mining sites and transport routes.

By formalising mining, building strategic reserves, and integrating gold into monetary policy, Nigeria can strengthen the Naira, reduce inflation, and create a more resilient economy. This approach requires coordinated efforts across legal, infrastructural, and international domains to ensure sustainable success.

Dr. Adedoyin Olumide is currently with Chartered Institute of Treasury Management (CITM)