Nigerians have, in recent times, found it exceedingly difficult to pay for services like education and health care in other countries due to the weakness of the naira, but the recent deal between Nigeria and China may just be the panacea to resuscitating the naira.
Reuters reported that the Director-General of the African Affairs Department of China’s foreign ministry, Lin Songtian, said the deal meant the Yuan will flow freely around Nigerian banks and will even be included in the country’s foreign exchange reserves. This deal is one of the outcomes of the meetings between Presidents Muhammadu Buhari of Nigeria and Xi Jinping of China, during the Nigeria-China Business/Investment Forum in Beijing, China.
Since 2014, the world market has recognised the Yuan as a likely global reserve currency, a replacement for the dollar, which has led countries like Ghana, South Africa and Zimbabwe to integrate the renminbi (Yuan) into their financial markets. As a result of this, trade (however, imbalanced) has increased between certain countries on the continent and China, as well as providing a fertile ground for demand for the currency on the continent.
Now, the question is, will this integration of the Yuan help to shore up the naira as intended by the President? The answer lies in the tentative decision that African countries are taking to dump the US dollar as the prevailing currency in their foreign reserves.
As Nigeria is set to begin to deal in Yuan, hopefully the demand for the dollar would plummet and this in turn would weaken it.
This deal with China is a very important response to the country’s current challenges occasioned by the sharp drop in international crude oil prices and Nigeria’s sharply reduced foreign exchange.
Nigeria’s Minister of Finance, Mrs. Kemi Adeosun, also said government is considering investing in Panda bonds; these are renminbi-denominated bonds sold in China by foreign entities.
With close to 60% of Nigeria’s import coming from China, the deal is expected to tame the escalating cost of import because of low demand has ensured the Yuan currency is friendlier.
The exchange rate is N30 to the Yuan, while the Yuan exchanges at 6.48 to the dollar. At that rate, 1,000 Yuan amounts to N30,000, converted to the dollar, 1,000 Yuan could fetch $156.25. If this is converted to naira on the parallel market rate of N320 to the dollar, one gets N50,000 for a transaction initiated with the N30,000.
However, that in a lay man’s view paints the picture of how naira-friendly the Yuan could be, and the likely gains from the use of Yuan as currency for trade between Nigeria and China.
Even though details are still sketchy, what is known at this point is that trade transactions between Nigeria and China would now cut the US dollar as the compulsory middle currency. This will, however, in turn reduce the demand for dollars from the Central Bank as China is Nigeria’s largest source of imports.
This deal throws up some salient issues. First, cutting out the dollar would facilitate Nigeria-China trade and could boost our imports from China.
Such outcome will, however, stymie government’s efforts to boost local industry. Hence, our demand for dollars still far outweighs any demands for Yuan as crude oil and petroleum imports, not to mention manufacturing equipment and spares are pegged in Dollar on the global markets together. These generate probably 80% of our dollar demand thus unless we can convince the whole world that the Yuan should be the global currency to trade or Chinese’s agree to pay for our crude oil in naira, this will have literally little or no effect on the dollar-naira rates.
This can also bring about import dependents and shifting from importing goods to producing goods would not be easy.
China has a very strong cost advantage in terms of production and it’s simply means that today, virtually no Nigerian manufacturer can compete favourably with Chinese made goods. So if we open our boarders to Chinese goods and we are importing fine product, then we would not grow local economy.
The currency deal does not spare Nigeria the task of earning Yuan to pay for Chinese imports. That is, we must increase the exports to China. This calls for a concerted policy to identify products for export and boost their volume and quality so they can be competitive in Chinese and other markets. Also the $6 billion Chinese loan also leaves analysts scratching their heads. Since the Chinese is not a charity organization, it would not fund Nigeria’s infrastructure projects and give Nigeria the economic heft to be less dependent on Chinese imports, unless it works out a hefty benefit somewhere else.
We must develop a comprehensive economic policy that would take care of our trade policies, exchange rate, monetary and fiscal policies, then we would define how we want to complete and grow Nigeria’s economy.
Thus, the devaluation or the exchange rate would now be subset of that national economic policy and will have been designed to further the purpose of the national economic policy.