In a classic case of two single parents getting married, Nigeria signed a currency swap deal with China, making it easier to transact trade deals in the Chinese currency, the yuan. The deal between the Industrial & Commercial Bank of China Ltd (ICBC), the world’s biggest lender, and Nigeria’s central bank (CBN) means the yuan now flows in Nigerian banks, and is included in Nigeria’s forex reserves. The deal reached between President Buhari and Chinese President Xi Jinping, aims to shore up the naira as sinking oil prices wipe out foreign reserves and weakens the naira. Buhari has rejected calls to devalue the naira; hoping diversification from dollar to yuan will alleviate forex pressures. However, this can only buy more time; it would neither diversify Nigeria’s economy, nor avert what will eventually be a tsunami devaluation of the naira. Saving the naira demands the CBN to end the dollarization of the economy.
Going forward, Nigerian traders and businesses, which import mainly from China, will conclude their transactions in the yuan, instead of the dollar. This means Sino-Nigerian trade will be concluded without having to use the dollar. Being the only African country with the agreement, Nigeria now becomes the clearinghouse for yuan denominated transactions for the continent. Yet such measures do nothing to resolve the fundamental distortions in the Nigerian economy. Instead, it renders the Nigerian financial system vulnerable to the vagaries of China’s manipulation of its currency. The question then becomes what Nigeria stands to gain from this deal at this point of high uncertainty and potential economic instability, given the volatility in the Chinese economy?
As a country, China is in a dangerous no-man’s-land between free market capitalism and state control. And the yuan is the prime example of what a perilous place this is. Partly because a stronger dollar has been dragging up the yuan, the Peoples Bank of China (PBOC) decided to abandon its loose peg against the dollar for a basket of currencies, which now includes the naira. The persistent gap between the official value of the yuan and its market price suggests investors expect China to allow the yuan to fall in the future. And there are good reasons for China to do so, at least against the dollar. This would further alienate foreign investors already spooked by Nigeria’s unorthodox monetary policy.
Frankly, Nigeria in this deal can be likened to a 50-year-old woman with two children, marrying a 75-year-old man with ten children. Love might be their least common denominator, but when push comes to shove, each spouse will defend their own children. Nigeria may be running away from the dollar, but China holds trillions of dollars in US bonds, therefore any depreciation of the dollar, which strengthens the naira, is not in China’s interest. A weak yuan ensures Chinese exports remain cheaper. It is unlikely therefore, that China would promote a stronger yuan and may, in fact, as self-interest, actually ensure the yuan remains weak or better still depreciate against the dollar. If China pursues this obvious strategy, Nigeria will again be the loser, as the yuan component of its foreign reserves will also lose value! The naira loses value with rising dollar reserves and similarly loses greater value with depleting dollar (yuan) reserves; a case of heads we lose, tails we lose!
In addition to this anomaly, naira purchasing value will further suffer when the yuan appreciate against currencies like the euro. Nigerian businesses sourcing raw materials from Europe, for example, would have to fork out larger naira sums for euro denominated imports, whenever yuan rates appreciates against euro, even though euro FOB prices may not have changed. So, one can safely predict that in view of the yuan’s progress towards convertibility now that the IMF has included it in the basket of currencies that make up its Special Drawing Rights, the yuan may suffer further loss against other currencies. In this event, Nigeria will unwittingly inherit imported inflation because of the naira’s pegging to the yuan.
Besides, business and trade relations between Nigeria and China have grown astronomically in the last decade with bilateral trade volumes rising from $2.8 billion in 2005 to $14.9 billion in 2015. But there is a large trade imbalance in favor of China as Chinese exports; mostly finished products represent some 80% of the total bilateral trade volumes. Nigeria accounted for 8.3% of the total trade volume between China and Africa and 42% of the total trade volume between China and ECOWAS countries in 2015. A sharp devaluation of the yuan would cause mayhem in Nigeria as the naira will grapple with the deflationary pressures exported by China. All the nonsensical mercantilist’s arguments in favor of the deal would not change this dynamic; rather it might only make things worse.
The problem of naira value is not so much the product of international currency markets as much as the product of a domestic forex market, which has been consciously, skewed against the naira by CBN’s monopoly of Nigeria’s dollar reserves. The mismanagement of the naira together with the numerous plagues afflicting the economy springs from dollarization of the economy, which involves illegally printed deficit-financing naira funds that the CBN substitutes for withheld dollar amounts from the Federation Account (FA) oil receipts. This has given rise to high inflation, constant depreciation and periodic devaluation, thereby eroding the quality of the naira as a dependable store of wealth (a critical function of money).
It defies logic for CBN to hold relatively huge dollar reserves with little or no yield, while Nigeria goes to the international capital market to borrow same dollars at astronomical rates. It is also irrational for CBN to sell dollars at face value to bureau de change, while government borrows dollars at a relatively high cost! There is no better way to drive home the point than the inherent fact that the deindustrialization of Nigeria is assured by such contradictory policy directions and actions of the monetary authorities.
It bears repeating for the sake of emphasis that the economy wears the hostile conditions and hallmarks of an economy steeped in unbroken excessive fiscal deficits, with forex from oil sales squandered in the name of defending the value of the naira in the sham forex market. In the process, the country has only managed to stave off excessive fiscal deficit-induced meltdown of the naira. The CBN should infuse available public and autonomous forex into the economy by means of the managed float system. In spite of the dwindling revenue from falling oil prices, the correct infusion of available oil-derived and autonomous forex would produce truly positive results, where up till now; great economic damage is being wreaked by the substituted excessive fiscal deficits that are proportional to the contribution of over 50% by oil earnings to the country’s annual budget.
Above all, buttonholing the naira to the yuan will not tame inflation to single digits with the ever-present plague of excess liquidity deliberately created by dollarization. If CBN abandons its obstinacy with policies that contradict the prescriptions of economic theory for dealing with fiscal and monetary policy defects; including dollarization, the ever-present ghost of excess liquidity will be laid to rest; interest rates and inflation will fall drastically, and the naira would begin to appreciate. This might also lead to some clearer thinking by Mr. President and his CBN Governor; to consider holding some forex reserves in more stable instruments like precious metals such as gold or better still, invest in major infrastructural projects. That is how you save the naira and save Nigeria. There is no painless way out!
