It is still difficult to situate the economic value of the currency deal with China
The exact deal President Muhammadu Buhari struck with China during his recent visit is still shrouded in speculations since officials continue to contradict one another. But what is very clear is that in the attempt to find short-cut solutions to the current economic challenge that manifests in an unstable foreign exchange market, the administration is looking towards China and its currency, yuan. Yet there are too many questions left unanswered on the whole issue.
China has historically been accused by Western nations of artificially weakening the yuan to encourage exports, implying that a weaker yuan gives China an undue advantage over other stronger currency nations. The converse will also be correct: a weaker yuan will discourage imports of foreign goods into China as their prices would become uncompetitive. Therefore, in the event of a swap deal, will Nigeria also fall prey to a relatively weaker yuan especially given the current balance of trade in favour of China?
For sure, a currency swap would mean that the Chinese yuan would begin to rank with the dollar, euro and to a lesser extent, the pound sterling as a second currency in Nigeria, the local currency, the naira, being the first. It also means that Nigerian banks can open letters of credit in yuan instead of the dollar, euro or sterling. Theoretically, this deal will enhance trade between the two countries. From a currency risk management perspective, by including the yuan in our foreign reserve basket, we reduce the exposure of our foreign reserve to the volatility risk of any single currency, especially the dollar.
However, China is a trading partner in the purchase of our crude oil, which is responsible for over 80 per cent of our foreign exchange earnings. If China now pays for that with yuan, our stock of yuan increases while our dollar receipts will decrease by the same amount. But the relevant question here is: given the balance of trade between China and Nigeria of over US$14 billion and growing, will the yuan supply gap in Nigeria not imply an upward rate push eventually of the yuan, thus bringing us back to square one?
Again, if a lower foreign currency rate implies encouragement of imports rather than exports, why are we so stuck on a stronger naira which translates to export of local jobs as we import goods from foreign lands? Besides, from where are we going to get enough yuan to stabilise the naira and keep it strong since that appears to be the main economic objective of the administration?
Put differently, we must do something to earn yuan except we are borrowing from China; and if we borrow, we must pay back someday. If we don’t, then we must sell something to China to be able to trade in that currency. The point we are making is that other than oil, we have nothing more to sell to China, but we buy so many things from them.
Even though a currency deal with China signals politically to the West that we “belong to everyone and we belong to no one”, it is nonetheless still difficult to appropriate economic value to such a relationship. But what has become very clear is that the rigour required to build a productive economy with a strong export base, which will eventually stabilise our currency, cannot be escaped by a currency swap, whether with yuan, euros or dollars.
If we endure the sacrifices that pursuing the necessary monetary and fiscal policies that will ultimately help us to rebuild the productive sector we,require, it will serve the nation better in the long run. We are quite aware that the time to do all these was yesterday. But it is better late than never as we urge the current administration to put in place policy instruments that will help create job-led growth.