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Optimism, Caution with Yuan as forex alternative, bilateral ‘smoother’


Yuan, China Currency

Yuan, China Currency

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, whose 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 in behalf of state’s interest, where government’s control is not absolute.

Statistics have shown that between 2013 and February 2016, Nigeria received $213.4m worth of capital inflows from Mainland China, which is about 0.4 per cent of the $52.4b 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 $484.2m 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 $30.6b 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 7.8 times more than Nigeria’s export estimated at $3.5 billion. China remains one of the few trading partners 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 has 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,” the Head of Investment Research at Afrinvest Securities Limited, Ayodeji Eboh, said.

According to reports, the Minister of Finance, Mrs. Kemi Adeosun, once indicated the Federal Government’s interest on the possibility of raising debt capital in the Renminbi to take advantage of its cheaper cost of borrowing. The question remains: Is this the long sought opportunity to boost capital links with China and seek better trade terms?

As the second largest economy globally, with its products in almost all the countries of the world, its influence is fast becoming irresistible. Besides, its politics of economic annexation, particularly in emerging, developing and under-developed countries, may be instructive to note with seriousness that it would not be a cheap bargain, including the ongoing deals.

For Nigeria, if the ceteris paribus (all things being equal) theory holds true in the deal, it means that the dollar demand pressure has effectively lessened. The exchange rate also would be headed for crash in favor of the Naira too. But what is not clear yet is the perception and reactions of the Western countries that would be affected directly or through multiplier effect.

It also means that the more than 22 per cent imports and the importers that have been complaining over the paucity of foreign exchange for purchase of raw materials, would soon raise and/or revive their respective productive capacities.

So far, in what could be gleaned from the “scarce” information and controversies regarding the currency deal include a Foreign Direct Investment (FDI) worth $5.8b negotiated between Nigerian private businesses and state governments with their Chinese counterparts, with sectors of interest covering power, solid minerals, road and rail transport infrastructure and housing.

It is also on record that Dangote Cement Plc has negotiated a $2b loan with the Industrial Commercial Bank of China Limited, while the currency swap deal is still being negotiated or finetuned. At the moment, the currency arrangement with the ICBC would let China and Nigeria trade directly in Yuan and Naira.

China, of course, knows the desperation and may want to price it in the bargain. The temptation is that we may give off or trade off vital issues, which would at last put the assessed great deal on the path of insignificance.

Foremost industrialist, Mazi Sam Ohuabunwa, in a monitored programme, said that the optimism greeting the Nigeria-China deals may pale into nothing, if the negotiators fail in the contents and terms of the agreement, especially, knowing the antecedents of similar deals other African countries 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 in getting 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.

For analysts at Afrinvest, the strong participation of private investors in the FDI and loan agreements sealed will improve the implementation rate relative to past bi-lateral investment engagements and could potentially boost capital importation from China and domestic infrastructure investment.

“We are currently caught in-between the two positions taken by the CBN Governor and Minster of Foreign Affairs. While 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, or 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 prices 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,” they wrote in a note to The Guardian at the weekend.

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