Warns that Naira may be overvalued
By Akoma Chinweoke
Mr. Johnson Chukwu, the Managing Director/CEO, Cowry Assets Management Limited,is an investment banker and key player in the capital market with specialisation in oil and gas, bonds and equity and other financial instruments. In this interview, Chukwu warns that the currency swap policy with China may overvalue the Naira, make import cheap and, in the long run, not allow the country to diversify its economy which is very critical to the economic development of Nigeria. Excerpts:
What are the likely advantages of Nigeria’s currency swap agreement with China which was a fall out of his recent visit to the Asian tigers?
The basic reason why currency swap was actually designed in the first place, is to relieve companies or institutions of liquidity pressure as in relation to other currencies. So, the benefits of the currency swap between Nigeria and China is that it would relieve Nigeria of the current liquidity pressure it is going through . The CBN has not been able to meet the demand for foreign currencies particularly the dollar and from what the CBN governor said recently, the demand for foreign exchange in terms of our import bill is about 4 billion dollars per month whereas our foreign exchange receipt is at the level of 900million to 1 billion per month. So, we are only earning about one quota of our demand. That created a lot of foreign exchange scarcity.
So, by going into a swap deal with China which accounts for about 22percent of Nigeria’s import bill, then, depending on the amount of the currency swap, which as not been defined, it would certainly relieve the foreign exchange reserve and also reduce pressure on dollar because it simply means that Nigeria banks can establish sector of credit in Yuan and then Nigerian importers can actually import using Yuan as a currency of trade instead of the dollar . So, certainly that would shift a lot of burden from Nigerians who needs to demand for dollar and convert to Yuan and then that step currency conversion would now not necessarily be involved in trade between both countries but ultimately, we need to even know how much, if there is, of the currency swap that was agreed or that should be agreed because it is not an open-ended issue as you are not allowed to import any volume from a country that you have a currency swap agreement with. The currency swap agreement has a defined amount and a defined time-line. So, we need to know those things to even understand the magnitude if any, of the currency swap.
Since every coin has two sides, what do you think are the disadvantages of the currency swap for country like ours?
The disadvantages for a country like Nigeria is that we are import dependent and shifting from importing goods to producing goods would not be that easy. China has a very strong cost advantage in terms of production and it simply means that today, virtually no Nigerian manufacturer can compete favourably with Chinese made goods. So, if we open our boarders to Chinese goods and we are importing final products, then we would not grow the local economy. I suggest that inherent in that in that currency swap, whatever economic bilateral agreement Nigeria is going to be entered with any country, there should be a trade policy that will compel whoever is exporting goods that can also be produced in the country should set up in the short medium term, manufacturing outfit to produce those goods in that country. We should have adopted that to domesticate the manufacturing of cement, sugar production and also extend it to a couple of other products where Nigeria has relative advantage in terms of production because we have the raw input materials here. When you have the input materials in your country, you should use trade incentives and fiscal policies to encourage the production of those goods .
I have a couple of products that readily comes to my mind . There is no reason why we should be importing granite related products because we have a lot of granite deposits in the country. Also, there is no reason why we should be importing ceramics items because we have the plants that would key in these materials, Why we should be importing textile materials when we have cotton here?. A couple of those products where Nigeria has relative advantage such as wood products and tyres, we should have them domesticated. Many of them are still coming from China and there is no reason for that. So, if we have trade policies and they tend to encourage manufacturers to set up outfits in the country, certainly, we would be domesticating productions otherwise, a new policy that overvalues naira like a swap policy would likely do and make import cheap would certainly not allow the country to diversify which is very critical to the economic development of Nigeria. We must develop a comprehensive economic policy that would take care of our trade policies, exchange rate, monetary and fiscal policies, then we would define how we want to compete and grow Nigeria’s economy and the devaluation or the exchange rate would now be a subset of that national economic policy and will have been designed to further the purpose of the national economic policy Economies are not managed in isolation because one economic action will have multiple effect on several things. For me, in as much as I support appropriate pricing of the naira, but it should also come with curtail of policies to mitigate the cost of that appropriate pricing and help the country grow its economy.