Forex crisis and unfinished naira-yuan swap deal
Barely five months after a currency swap deal between Nigeria and China was enmeshed in controversy, the country’s import profile from the Far-East Asian nation has remained high and intermediated by the dollar.
While government denied striking such deal, the earlier move was widely celebrated as a panacea to unending huge dollar demand and pressure on the local unit. Still government agreed that the renewed relationship opened a new vista for the country’s political and economic relations with China, particularly as a major trading partner.
But a financial analyst close to government sources said the current administration has fast “developed a penchant for inaction or snail-paced response” to economic decisions that are capable of helping the struggling economy.
“While China’s gift can be a ‘suspect’ at certain times, it makes no sense to transact business with the country that records nearly half of our import bill in another currency, when it’s currency has been globally accepted as international one. This is all about running around, but not without self inflicted costs like exchange rate pressure,” the source said.
An investment and wealth advisory company- Afrinvest Securities Limited said that the strong participation of private investors in the Foreign Direct Investment and loan agreements will improve the implementation rate relative to past bi-lateral engagements and could potentially boost capital importation from China and domestic infrastructure investment.
“We are currently caught in-between the two positions taken by government. While still awaiting official clarifications, we think the ‘currency deal’ could either be a conventional swap, in which the CBN and China would exchange a stock of their currencies at a predetermined exchange rate to be reversed at maturity of the swap line. It could also be a move by China to boost yuan-liquidity in Nigerian banks as a trade and investment currency in exchange for future assets transfer (probably oil) to China to liquidate the swap line.
“While we believe a ‘currency deal’ with China is not an effective substitute for appropriate fiscal and monetary policy flexibility in adapting to the lower crude oil price environment, we still view the development as positive as it could reduce the cost of transaction with Nigeria’s largest trading partner and also ease the immediate foreign currency challenges associated with Nigeria’s negative terms of trade.
“Key risk to the downside is that the ease of transaction with a highly competitive country like China could worsen Nigeria’s trade balance and weaken domestic manufacturing capacity. We think this concern is justified and further emphasizes the need to deepen domestic policies on improving competitiveness,” the company said in a note to The Guardian.
Of course, the Nigeria-China currency deal, beyond the anticipated easing in foreign exchange logjam, especially for importers with bias for the Far-East Asian country’s products, hold other promises, as well as challenges, going by the proverbial “two sides of a coin.”
For one thing, former President Goodluck Jonathan also made a similar visit to China in 2013 in which several infrastructure deals were signed, but later, the economic integration between the two countries was reduced to trade than finance and capital flows.
This is especially true with China, a country which political ideology currently swings on almost equal proportion between capitalism and state control. Although the ICBC appear to be independent and capitalist-oriented, the obvious is that as a corporate citizenship, it would always act on behalf of state’s interest, where government’s control is not absolute.
But a top source at the Central Bank of Nigeria (CBN), unequivocally said there was no such deal and that it only existed in speculations and news reports.
But asked if such would not have been an option for the country, the source said that issues of that nature bother on both monetary and fiscal ratifications.
“If it is swap, how will it be exchanged- crude oil, reserves, or what? You find out that whatever, CBN government will be involved. It is an option that must be weighed thoroughly on its merits,” the source said.
Foremost industrialist, Mazi Sam Ohuabunwa, in a monitored programme, said that the optimism greeting the Nigeria-China deals might pale into nothing, if the negotiators fail in the contents and terms of the agreement, especially, knowing that antecedents of similar deals on other African countries have not been totally progressive.
“If the deal will give off technology transfer, employment opportunities and unfair competition against local investors, then it makes no economic sense,” he said.
He warned that Nigeria must have sound and focused representatives to get a favorable deal out of this development, not being blindfolded by the momentary gains, at the expense of other long term opportunities.
“What is the economic sense if the deal allows Chinese to take 100 jobs out of 110 jobs, leaving only 10 for Nigerians?” he queried.
The Foreign Affairs Minister, Geoffrey Onyeama, once admitted: “It’s not really a swap…They agreed that the money should be internationalised. So, they started that for a while. They were protecting it also. They did not allow it to be fully exchangeable. But now, their economy is fully strong, they are looking for a way to internationalise the currency. Now, they were saying essentially that they wanted to segment it.
“In West Africa, they are looking for a hub. Ghana is interested in being the hub for the currency to circulate for those who want to use it. It is not compulsory. But Nigeria is a bigger country with a bigger economy. So, that does make sense. And they became a kind of attracted to Nigeria to be the hub. So, for us, the benefit is that it gives us small flexibility.
“So, if Nigeria is buying Chinese goods, for instance, it will be in our interest to use the yuan because we know there is a lot of squeeze for the dollar. But we still use the dollar. But if it is not enough and there are some people who want to invest in the country, instead of crying that they cannot take dollars out, there might be yaun that they would be happy to take out because it is now internationalised as a currency and they can use it. So, it gives us a much larger option.
“As you know, a lot of importers now are complaining that they are not able to access the dollars to buy goods and things like that. So, if in addition to dollar, we have yaun, then they can also make it available. So, it has given us a greater opportunity for those people who now import notwithstanding the shortage of dollars. So, that is really what it’s more about rather than a swap deal or any such thing.”
Statistics have shown that between 2013 and February 2016, Nigeria received $213.4 million worth of capital inflows from Mainland China, which is about 0.4 per cent of the $52.4 billion total capital importation into Nigeria within the period, ranking as the 18th largest source of foreign capital inflows into Nigeria. But including the autonomous region of Hong Kong, total capital flows from People’s Republic of China was $484.2 million within the period, still less than one per cent of total capital importation into Nigeria.
Similarly, trade relations have been on the rise, with merchandise trade between the two countries estimated at $30.6 billion between 2013 and 2015, representing 8.5 per cent of Nigeria’s total merchandise trade.
Consequently, the Balance of Trade is heavily lopsided in favour of China, where import from the country between the review period is 7.8x more than Nigeria’s export. China remains one of the few trading partners that Nigeria still operates trade deficit with, with 22 per cent of Nigeria’s imports between 2012 and 2015 from China, while only 1.5 per cent of exports went to China.
“Efforts to buoy capital integration have mainly been a unilateral objective of Nigeria. The CBN over the past five years has built up its stock of external reserves denominated in yuan from $101.3 million in 2011 to $2.2 billion, representing 7.5 per cent of gross reserves, as at first quarter of 2015,” Ayodeji Eboh of Afrinvest’s investment banking arm, said.
The latest report of the country’s import trade by Nigerian Bureau of Statistics stood at N2.1 trillion at the end of second quarter (Q2), 2016, showing an increase of 38.1% from the value N1.5 trillion recorded in the preceding quarter. The increase in import value can be traced to a decline in the value of the naira.
The structure of Nigeria’s import trade by section was dominated by the imports of boilers, machinery and appliances; parts thereof, which accounted for 34.9 per cent of the total value of import trade in Q2. Other commodities, which contributed noticeably to the value of import, were mineral products 15.8 per cent, vehicles, aircraft and parts thereof, vessels 14.7 per cent, products of the chemical and allied industries 7.6 per cent and base metals and articles of base metals 5.1 per cent.
The import trade classified by broad economic category revealed that capital goods and parts ranked first with N663.6 billion or 32.1 per cent. This was followed by Industrial supplies with the value of N421.2 billion or 20.4 per cent and transport equipment and parts with N356.1 billion or 17.2%. The value of motor spirit stood N296.1 billion.
Interestingly, Nigeria’s import trade by direction showed that it imported goods mostly from China, Netherlands, United States, India and the United Kingdom. The imports’ were N493.5 billion or 23.9 per cent, N285.7 billion or 13.8 per cent, N199 billion or 9.6 per cent, N124.9 billion or six per cent and N119.3 billion or 5.8 per cent of the total value of goods imported respectively, during the quarter. Further analysis of consumed goods is largely from Asia with import value of N886.1 billion or 42.8%.
While the move is still a stalemate, experts were optimistic that such would be positive step for the country.
The President of the Nigerian Statistical Association (NSA), Dr. Mohammed Musa Tumala was reported as saying that the currency swap deal will ease the demand pressure on the naira.
According to him, the option of taking to yuan-denominated bonds sold by overseas entities would provide support for the weak naira, following sliding value against the dollar, euro and others. Again, the yuan is cheaper than euro bonds.
Similarly, the Chief Consultant of Lagos-based B. Adedipe Associates, Dr. Biodun Adedipe, has said that the naira/yuan conversion deal has the prospects of shoring up the fortunes of the nation’s currency in the foreign exchange market.
He was optimistic that the initiative would ease trading transactions by investors in both countries, as the ordeal of converting the two currencies, first to dollar would cease, giving exchange value advantage to the traders.