Nigeria’s central bank will convert 10% of its $33-billion in foreign reserves to the Chinese yuan, as trade between the two countries continues to grow. We asked Thabo Ncala, co-portfolio manager at Stanlib’s Africa Fund whether the growing support for the yuan indicates waning confidence in the dollar.
Why does Nigeria consider China as a safe haven?
The primary reason countries keep reserves is largely for global trade, that is, to pay for imports even when their own currencies depreciate.
This is why many commentators liken foreign reserves to ‘import cover’.
Historically, the major players in global trade have been the US, the UK and the Euro zone. Consequently, most countries keep reserves in the US Dollar, GB Pound and the Euro. However, these developed regions are no longer the leaders in global trade, as China is increasingly becoming a major force.
As at the end of 2010, China was Nigeria’s largest source of imports (26% of its total imports). So, why does Nigeria need to first convert its currency to USD, then to the yuan? Why should Nigeria pay for imports from China in US Dollars?
Does the growing support for yuan reserves mean that confidence in the dollar is waning?
A significant point to mention is that Nigeria (much like South Africa) suffers dearly from the negative movement in currency, which causes inflation to rise as the naira depreciates. Negative portfolio flows tend to cause inflation and hence affect the real economy.
Consequently, the people of Nigeria suffer as a weaker naira makes imports more expensive. Nigeria imports a lot of goods because there is no adequate capacity for industrial production. The point here is that trading in another currency is likely to moderate the effects of the USD/naira movements.
Is there a political message in the announcement made by Nigeria’s CBN governor?
China is becoming one of Africa’s major sources of foreign direct investment and it would therefore make sense for countries to create relationships with Beijing.
A lot of emerging markets have been lobbying the International Monetary Fund (IMF) to include their currencies in the reserve currency weights.
We expect the IMF to do exactly that at some point. Because it is arguably now the leader in the emerging markets space, it makes sense for African countries that are doing business with China to start considering currency changes now.
We think it is becoming increasingly clear where the world is moving to, and China would probably be a good bet for those countries that are seeking alliances. So politically, it sends a strong message to the Chinese that Nigeria is willing to support trade with them. This can have many positive spinoffs especially for the development of infrastructure.