Analysts see naira rescue in keeping more FX reserves in Chinese Yuan

Analysts concerned about the falling value of the naira are calling for the diversification of the management of the country’s foreign reserves and holding more of this in yuan, in order to put a halt to what they say is a threat to the economy.

Nigeria presently holds 75 percent of its reserves, totalling $30.69 billion in the US dollars, while only   7.5 percent is held in the Chinese yaun. Falling oil prices  has seen the domestic currency severely challenged in recent months.

The analysts further attest that increasing investment in the Chinese Yuan, which is becoming the defacto reserve currency, in view of the rising profile of that country in her trade relations with Nigeria, will greatly improve the fortunes of Nigeria’s economy.

Central banks all over the world use foreign reserves to manage their own currency’s value.

Nigeria is China’s third major export destination in Africa, after South Africa and Angola, while China is Nigeria’s largest source of imports and third major trade partner.

The volume of trade between Nigeria and China has continued to ascend, with the volume reaching N38.01 trillion last year.

“We suggest that another approach to apprehend the dwindling reserves in the face of a falling naira, is that the CBN should diversify the nation’s foreign reserves based on a strict pro-rata of the currency of import settlement. We believe that keeping a large chunk of the reserves in U.S dollars seems suboptimal, since the U.S. is not the country’s leading trading partner any longer.

“This, we think, will go a long way in preserving the domestic currency against any disparaging dollar direction and ultimately give some respite to the dwindling reserves, says Essien Usoro, head research, Greenwich Trust Limited.

Besides, the reduction of export of the nation’s major foreign exchange earner, oil, to the US, due to the introduction of the shale gas in that country, and recent moves by the US Fed, signaling its intention to raise interest rates, with its attendant reduction in foreign direct investments, may have heightened calls for diversification.

Also, the CBN in its current report on the development in the external sector for the first quarter of the year, released last week, noted that currency compositions of the Nigeria’s reserves declined in all the invested currencies, dollar, euro and pound, except those in yuan, which increased by 0.4 percent.

According to the CBN, the stock of external reserves at end the end of March 2015 stood at US$29.36 billion as against US$34.24 billion and US$37.40 billion recorded at  the end of December 2014 and end of March 2014, indicating respective de-pletion of US$4.9 billion or 14.3 per cent and US$8.0 billion or 21.5 per cent.

Consequently, the CBN noted in the report that “In Q1 2015, the share of all the currencies in the basket declined from their respective levels in Q4 2014 and Q1 2014 except for the Chinese yuan which increased by 0.4 and 151.7 per cent. The currency composition of foreign reserves and their shares were; US dollar worth US$22.15 billion (75.4%), euro worth US$1.93 billion (6.6%), Chinese yuan worth US$2.21 billion (7.5%), GB pounds worth US$0.75 billion (2.6%) and SDR units worth US$2.31 billion (7.9 percent).

The implication on the current development where the forex reserves have been nose-diving is that, at $30.69 billion, as at July 22, 2015, the nation’s reserves are invested as follows; $23.04billion at the rate of 75.4 percent for dollars; $3.30 billion for yuan at 7.5 percent; $2.42 billion at 7.9 percent for SDR; $2.03 billion for euro at the rate of 6.6 percent and $0.80 billion for pounds at the rate of 2.6 percent. But the calls are coming, even as the CBN has reinstated its commitment to improving the level of forex reserves by sticking to the 41 items barred from accessing forex at the interbank market.

Godwin Emefiele,governor of the CBN, speaking after the Monetary Policy Committee (MPC) meeting which maintained statues quo in the policy rate and other indicators observed that the CBN is committed to achieving higher level of forex reserves, elimination of poverty and employment generation through encouragement of local production of goods for which the country is capable, so as to conserve foreign exchange.

Friday Ameh, an energy analyst, told BusinessDay at the weekend that the reported abuses of the crude oil swap by the last regime, provides opportunity for Muhammadu Buhari’s government to rather orchestrate a currency swap with China, which would allow the Asian power to conduct more of its Nigeria dealings in its own currency.

Ameh believes that would mean also taking advantage of the declining profile of the US dollar as the world’s most widely held reserve currency, accounting for nearly 61 per cent of global allocated reserves, from over 70 percent at the end of last year.

Commenting further Usoro said “plugging of leakages may be improving FX reserves ($31.9bn on 7 July, according to the central bank). But as long as the price of the biggest source of FX inflows, oil exports, remain low, we are reluctant to attach any significance to this. Plus reports of pent up FX demand ($4bn, is one estimate from discussions with local banks) implies liquid FX reserves are lower than the official number.”

Lamido Sanusi, immediate past governor of the CBN, had in 2011 called for the increase of the forex reserves in yuan to 10 percent, about $30 billion, with some analysts arguing that the yuan, pegged to the dollar until not long ago, had managed more recently to keep Chinese exports cheap and thereby turning into a global reserve currency.

“The rise of China’s yuan as a global currency – trusted by central banks, accepted by finance ministries, routinely used to purchase raw goods – is “inevitable,” Sanusi had said.

John Omachonu