The Nigeria-China currency deal is a welcome development but only in the short term. With the new currency deal, both countries will hold each other’s currency in their foreign exchange reserves, which makes it easy for their citizens to directly access both country’s currencies without the need for intermediary currency, largely Dollar. This will mean loss of demand for Dollar. Demand for Dollar will now come for direct importation from the USA. This will crush the dollar compare to Naira in the money market.
However, the Chinese Currency-Yuan, will now be exposed to direct demand from Nigerians, and this means the heavy importation from China will further increase the demand for Yuan. This will make China to hold more of Naira in its reserves, and Nigeria hold less of Yuan in its reserves due to the resultant stimulation of latent demand for the Yuan.
A single Yuan is now exchanged for N30, and with easy purchase of Yuan and continues importation from China, the demand for Yuan will increase, and its value will appreciate. And this will continue, everything being equal.
We will then see a fall in demand of Dollar for Yuan, which will further depreciate Dollar compare to Yuan, and with continues American importations from China, the Dollar may further lose its competitiveness. This will extend to further restore the value of Naira to Dollar.
However, with Yuan being cheap to get and easy to import from China, the Chinese tend to benefit more, as this will serve as incentives for Nigerians to import more from China, ceteris paribus. This will then lead to increased supply of the Naira for Yuan, and which will lead to appreciation of Yuan over Naira. And if this trend continues, Yuan will no longer be any different from Dollar in near future without structural change. The Dollar used to be exchanged for N30 seventeen years ago, and now it is around N200. This is due to continues importation from America especially of Petroleum Products and Cars and other consumables, and for it being intermediary for importations from China. The Nigeria’s largest import origin is China, which worth $11.6 billion as at last year, which is 44% higher than imports from America. Because the demand for Yuan was largely shielded by the Dollar intermediary, the demand for Yuan will be visible and direct, making it possible to appreciate more compare to Naira.
This currency deal is very good as a short term measure, but if no structural change, we will see Yuan appreciating higher and likely reaching N200 in few years. The Chinese people may not need much from Nigeria currently, so even if China hold much of Naira in its foreign reserves, it might not see the demand for it. So efforts has to be in place to stimulate Chinese demand for Naira. Therefore, to consolidate this development, there must be radical measures to stimulate economic independence, by diversifying the economy and improving the industrial, manufacturing and agricultural sector. This will offset any balance of payment deficit and enhance the exports from Nigeria, so that Nigeria will hold more of the China’s currency in its reserve. So, there should be more productions in Nigeria and reduction of importation. Nigeria can have a statistics of major importing goods and services and then invest heavily to enable production of these goods and services within the country.
Petroleum refining is the sector that requires serious and immediate investment, because, over the years refined petroleum contributed so much to the pressure on Naira. In last year, it contributed the largest proportion of the imports to Nigeria (17.9%). If we can stop importing refined products (which we must), then our economy will be much stronger, as the demand for our crude oil is still inelastic.
With the Chinese offer to give $11.1 billion loan to Nigeria, this will weaken the Nigerian competitiveness, as Nigeria will have to use the Yuan in its reserve to pay for the loan and the interest, making the supply of currency from Nigeria higher. The loan shall then be strictly invested to the manufacturing and industrial sectors that have stronger multiplier effects so as to offset the deficit.
Even if the Chinese decided to invest in oil refining and mining, their investment will be in Yuan, and they will be paid in Yuan, which will further deplete the Nigerians Foreign Exchange Reserves. The Chinese cannot invest in currency they have no control and confidence on. So, it is a ticklish situation. Despite our relatively small financial capacity to invest in the manufacturing sectors, we have to optimised and encourage local investments.
One good move, is that of additional $15 million injection on the Nigerian Agricultural Sector by the Chinese government, which if managed well, will invigorate the exports sector and reduce the trade deficit. This is a big support from Chinese government in addition to its willingness to offer more Nigerians scholarship positions and technical training slots. So, I will say this is one of the most impactful trip by Mr President.
Dr. Ahmed Adamu
Petroleum Economist and Development Expert
Pioneer Global Chairperson of Commonwealth Youth Council
University Lecturer (Economics), Umaru Musa Yar’adua University, Katsina.