President Muhammadu Buhari has drawn flak from some quarters over what is now branded as frivolous foreign trips. The president’s last trip to China probably remains the most controversial. He jetted out to the world’s second largest economy at a time when Nigeria was deep in energy crisis. The country’s power generating plants were silenced by gas pipelines vandals.
Thousands of micro-power generating sets that normally account for 80 per cent of Nigeria’s electricity supply were silenced by excruciating fuel shortage.
Buhari’s critics argued that with the country in darkness and movements curtailed by intractable fuel scarcity, the president should have stayed at home to sort out things.
Buhari and his handlers knew better than the arm-chair critics. He dared everyone and headed for China. The trip has come and gone and even with the president back at home, power failure and fuel scarcity have persisted because they are problems created by three decades of criminal negligence of successive governments. They cannot be fixed in 10 months.
As controversial as the president’s trip to China appeared, one of the deals he struck during the trip might, in the short term, ease the merciless grip of the dollar on the naira in the foreign exchange market.
China and Nigeria are battling divergent economic predicaments. Nigeria survives only on oil exports. It has run out of cash as a result of dwindling oil prices. China has too many goods to export but has run out of market because of tumbling commodities prices in Sub-Saharan Africa and the debt contagion in the Euro zone.
Unlike Nigeria, China sits on huge foreign reserve that is becoming a burden as investment outlets dwindle. China has trillions of dollars in foreign reserves and maybe paying punitive costs to keep its gold reserves with some vault operators.
China desperately needs investment outlets and export markets. Nigeria is a huge export market, but it lacks the purchasing power and needs to fix decaying infrastructure. Some sources contend that 60 per cent of Nigeria’s imports emanate from China. As Africa’s largest economy, the Chinese need Nigeria as much as Nigeria needs the world’s second largest economy.
During Buhari’s visit, the Chinese rolled out a $6 billion infrastructure loans package for Nigeria. The two parties would need time to work out details of the offer before anyonetakes the plunge.
What probably drew the highest attention during the president’s visit was the deal on the currency for use in the booming trade between Nigeria and China. Currently the U.S. dollar is the currency of trade between the two countries.
Nigerian importers bringing in goods from China have to buy dollars either in the parallel market or the official window of the Central Bank of Nigeria (CBN) to consummate their deal. As dwindling oil price depleted Nigeria’s foreign reserves, the CBN halted its Father Christmas posture of supplying dollars to bureau de change in the parallel market.
The gesture pushed the exchange rate of the naira in the parallel market to an all time high of N410 to the dollar before it receded to N320 some weeks later. Even at that atrocious rate, the dollars are nowhere to be found.
Though the federal government has defiantly kept the official exchange rate of the naira at N197 to the dollar, prices of goods and services have surged because everything is priced on the basis of the parallel market rate.
That explains why Buhari struck a deal that would make China’s currency, Yuan, the currency of trade between the two countries. When the deal is finally consummated, Nigerian importers would no longer have to convert naira into dollars for their transactions with China. They would convert to the Yuan.
With close to 60 per cent of Nigeria’s imports coming from China, the deal is expected to tame the escalating cost of imports because low demand has rendered the Yuan naira-friendly. The exchange rate is N30 to the Yuan while the Yuan exchanges at 6.48 to the dollar. At that rate, 1,000 Yuan amounts to N30,000. Converted to the dollar, 1, 000 Yuan could fetch $156.25. If $156.25 is converted back to naira at the parallel market rate of N320 to the dollar, one gets N50, 000 for a transaction initiated with N30, 000.
That in a lay man’s view paints the picture of how naira-friendly the Yuan could be, and the likely gains from the use of the Yuan as currency of trade between Nigeria and China. The deal would not only reduce the cost of imports from China; it could ease the merciless grip of the dollar on the naira by reducing the demand for dollars by as much as 40 per cent.
It amounts to a win-win deal for the two countries. China would sell more in Nigeria as the prices of its goods crash against dollar-based imports. Nigerian consumers, on the other hand, would heave sighs of relief as prices head south. But steps must be taken to discourage total dependence on Chinese imports. Power failure is at the root of Nigeria’s economic backwardness. It has to be tackled as an emergency in a desperate bid to boost productivity.
