The Central Bank of Nigeria (CBN) announced on 5 September that it had finalized arrangements to diversify its external reserves holdings by including the Chinese Renminbi to the existing currency mix of US Dollars, Euro and the British Pound Sterling.
The level of external reserves in Nigeria has been a much talked about topic for a while now, with the CBN governor calling on government to make attempts to raise the current level in order to allow the Central Bank to support the Naira and be able to stabilize prices - and the new Minister of Finance has made a commitment to act in this regard.
China is Nigeria’s largest import market, with imports from China at the end of 2010 worth 327 billion Naira, or 26% of total imports. This is followed by the United States with 20% of total imports.
In their statement, the CBN further noted that “Given the growing economic importance of China in the world, and the increasing trade flows between the two countries, the CBN initiative is expected to secure a strategic advantage for Nigeria in its economic and trade relationship with the People’s Republic of China.” We believe that this is a move that bodes very well for Nigeria's balance of payments, given their trade structure.
We also think that, given the currency volatility experienced by the exchange rate between the Naira and the US Dollar, determined mainly by portfolio flows, trading in a separate currency for a quarter of the trade imports will have a welcome effect. We have made the point previously that a large part of Nigeria’s inflation rate is determined by monthly average USD/Naira fluctuations. Therefore, Nigeria’s ability to import a quarter of its goods in a less volatile exchange rate will lead to more stable prices.
Headline inflation retreated for the second month in a row in July, falling to 9.4% year-on-year, from 10.2% in June and 12.4% May on the back of a stronger USDNaira and lower food prices.
However, we must note that 11% of exports are sent to the United States (mainly oil), while 20% of imports are received from there. This means that a fair amount of trade will continue to be in US dollars.
Gross External reserves currently stand at USD 34.8 billion, or 9 months imports cover, a level close to what it was this time last year, but still less than the USD 42 billion peak seen at the end of 2009.
Xhanti Payi
Assistant Economist
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