The template for public expectation from President Muhammadu Buhari’s recent visit to China was formally defined by Femi Adesina, in a press release which the President’s spokesperson published a day before Nigeria’s star studded delegation left Abuja. However, government’s apparent anxiety to fund the 2016 budget with external loans had become infectious and induced a popular perception that this was the main objective of the China mission.
Indeed, the Minister of Finance, Mrs Kemi Adeosun, told Reuters and Financial Times of London shortly before the trip, that Nigeria was negotiating a $2.5bn World Bank loan to partly fund the 2016 budget, because of the more favourable terms. However, Adeosun had also suggested that Euro denominated and Diaspora bonds were being considered alongside Panda bonds and a $2bn infrastructure loan from China, to fund the same budget deficit. Inexplicably however, the $2bn Chinese loan may not have materialised, but the minister quickly confirmed after the visit that home grown solutions were now being considered to fund this year’s budget deficit.
Evidently, on the heels of President Buhari’s meetings with the Chinese President, Xi Jinping, protocol agreements on various areas of co-operation and assistance were signed; these included the $1bn Abuja-Ibadan-Lagos Greenfield Expressway, and a 300 megawatt solar plant in Shiroro. Other more modest deals were also sealed for housing, rail transport and floating gas facilities. In addition, several private loan agreements were endorsed by Nigerian and Chinese businessmen, with the $2bn advanced to Aliko Dangote for establishing two cement factories as clearly the biggest chunk.
Furthermore, in another major agreement, China also offered a $6bn loan to specifically fund infrastructure projects in Nigeria. According to the Minister of Foreign Affairs, Geoffrey Onyeama, “the offer is a credit that is on the table as soon as we identify the projects.” In the light of Onyeama’s statement, it is disturbing that the Nigerian delegation may have embarked on the China trade mission without a clean copy of a defensible and coherent “wish list” that would have made access to the $6bn “on the table” immediately possible. It is advisable nonetheless, before we commit to the fresh $6bn loan, to thoroughly appraise why similar infrastructure loans obtained by former President Goodluck Jonathan’s administration failed to positively impact our economy. Nigerians should equally be concerned by government’s apparent fixation on external loans which have yielded minimal social impact over the years, especially when our own domestic money market remains embarrassingly awash with excess naira liquidity, while our own Central Bank of Nigeria also, ironically sits on almost $30bn reserves “just awaiting auction” to banks!
Conversely, in order to avoid increasing an oppressive national debt burden that already requires up to 30 per cent of earned income to service, the Chinese should advisedly be encouraged with special concessions, to inject the $6bn as private direct investment in Nigeria, to build and independently operate identified critical infrastructural projects for a period not exceeding 15 years, with a clear provision for Nigerian private sector partnership that would jointly run the establishment, from the 10 year, to ensure the sustainability of these investments. Additionally, Nigerian labour must be strategically integrated in the operations of such ventures to forestall wholesale importation of Chinese labour.
Notably however, the currency swap agreement between Nigeria and China seems to have particularly captivated more public attention. Basically, the swap implies that China would set aside a pool of billions of dollars equivalent of its “nearly convertible” currency (the Renminbi/Yuan) from which Nigerian importers can directly exchange their naira at pre-determined exchange rates, without first procuring dollars to complete the transaction. Regrettably, the Presidency has not yet published details relating to amount, tenor and applicable exchange rates that will govern these transactions and settlements.
Nonetheless, while briefing State House correspondents on the gains of the China trip, the foreign affairs minister suggested that the celebrated agreement was not a currency swap, as widely reported, but a recruitment of Nigeria into a partnership “that would facilitate China’s drive to internationalise its currency”. “So, far us”, according to Onyeama, “it has given us (our economy) greater opportunity, so that those people (who cannot readily access dollars) can now also import, notwithstanding the shortage of dollars.”
The CBN Governor, Godwin Emefiele, also noted accordingly, in a ThisDay report of April 18 that “the agreement on currency swap with China will definitely benefit Nigeria because the essence of the mandate is that Nigeria is designated as the trading hub with China in the ECOWAS sub region.” Emefiele further observed that “we believe that using the Renminbi will improve trade with China, as this will encourage importers to open L/Cs in the Chinese currency for the importation of raw materials, equipment and machinery from China, rather than other trading regions, so the agreement will encourage trade between both countries.”
However, a senior official of the Chinese Foreign Ministry, Lin Songtian, noted that the deal on Yuan transactions “means that the Renminbi is free to flow among different banks in Nigeria, and the Renminbi has been included in the foreign exchange reserves of Nigeria.” Invariably, with this deal, ultimately, the Yuan will also sell on our streets just like other convertible currencies.
In effect, in order to facilitate rapid acceptance in our sub-region, with Nigeria as hub, a clearing house with affiliation to the People’s Bank of China will invariably be hosted locally to allow the Renminbi to become a common settlement currency, which can also be used for bilateral loans or aid. Ultimately a new bank with affiliation to the Peoples Bank of China will be established locally and dedicated to intermediate on Yuan transactions in the sub region. The People’s Bank of China’s local affiliate will invariably also have a huge caché of naira at its disposal to invest, as it chooses, in any sector of the economy, including the stock market. Incidentally, after the bilateral talks, China’s official news agency reported that President Xi Jinping “expressed interest in economic cooperation with the Nigerian delegation, particularly in areas like oil refining and mining.” However, it is not yet clear if the currency swap deal also implies that China will pay for Nigeria’s crude oil in naira or Yuan.
In any event, the currency deal with China will bolster our Yuan reserves, but this will invariably also lead to a corresponding drop in our dollar reserves. Ironically however, China may readily depreciate its Yuan, if this is necessary, to promote export price competitiveness of its products in the United States and other dollar denominated markets. Unfortunately, in such an event, Nigeria’s increasing Yuan reserves would have been devalued and would buy less and less dollars than before. Conversely, as owners of trillions of dollar reserves themselves, China is also unlikely to support any dollar devaluation.
It is instructive that China is already in similar bilateral currency swap agreements totalling RMB 3.137tn (about $500bn) with 31 central banks including the United Kingdom and South Africa. Notably, China’s trade volume with these countries has since exceeded RMB 11 trillion after the swap agreements.
Nonetheless, Emefiele has however assured that “we are working to encourage exports of raw materials to China in order to reduce the trade imbalance” which is, presently, clearly heavily skewed against Nigeria with an annual import bill of about $15bn to China. However, the CBN Governor failed to explain how Nigeria’s domestic production and output will ever become internationally competitive enough to reduce this trade imbalance, particularly when inflation rate is trending at over 12 per cent while cost of funds to real sector presently exceeds 20 per cent and the unusual bondage of persistently surplus naira values also continuously threaten the local currency’s exchange rate and any serious hope of inclusive economic growth.
PUNCH
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