Catching up: on reserves, swap deals, and inflation

I’ve been out of the blogosphere for a while and a lot has happened since then. This is a quick round up of my thoughts.


First on the foreign reserves, which as at last week had hit somewhere around $47bn. Cue the statistic being turned into a political weapon and spun as some kind of economic success story. It bears repeating that the reserves are not a savings account of the federal government. Its basically a stash of cash (technically cash plus some liabilities) by the CBN in case something happens and emergency foreign exchange liquidity is needed. Emphasis on emergency. The recommended amount of reserves to hold is enough to cover six months of imports, which for us is somewhere around $14bn based on 2017 numbers.


Think about it this way: what is the difference between having a big emergency fund and a bigger emergency fund? Not much in practice. If we run into a scenario where we have to spend $15bn in reserves in a short period of time then we’re doing it wrong. At that point having $45bn or $60bn would not make a difference. For example, we had close to $40bn in reserve at the start of 2014 and we still ended up in a mess.


To be clear there’s nothing wrong with the CBN building up reserves. In fact, depending on the component of foreign exchange inflows, they should be building up reserves. Its just not something to tout as evidence of anything. Especially since that damning statistic is still there.



Speaking of damning statistics. The second big talking point was the swap deal. Finally eh? The central bank of Nigeria and the equivalent in China signed a deal worth about $2.5bn. Basically we gave them $2.5bn worth of naira and they gave us $2.5bn worth of renminbi. Both parties will refund each other at a later date, although the deal can be renewed.


What does it mean in practice? Well previously if you wanted to pay a company in China you first had to take your naira and buy US dollars and then pay them and they would take the US dollars and buy renminbi, or vice versa. Now you can just buy renminbi and pay them, saving on transaction costs.


Why are we signing a swap deal? Well China has been trying to take its currency global for a while now and they are signing such deals with almost everybody. And we don’t mind so why not. Its a nice boost to our reserves since we can print the naira we will give them. And in practice it might mean renminbi denominated domiciliary accounts in Nigeria soon which also doesn’t hurt. Plus you should be able to exchange your naira for renminbi at banks in China.


Will the swap deal “reduce pressure on the dollar” as is being touted by some sections of the press? Not really. We are still importing and exporting the same stuff so it won’t matter. Will it make stuff from China significantly cheaper? Again not really. Importers will save on transaction costs so I guess that is something but it will be really really small. Although I hear a rumour (rumour because no one I know has actually seen details of the deal) that the exchange rate agreed was the equivalent of the official N305 per USD exchange rate. If Nigerian importers are sold renminbi at the equivalent of that rate then that would basically mean China and our central bank subsidizing imports from China. Which would be very interesting indeed, not to mention ironic.


You may have noticed that I have mentioned nothing about the other side of the trade with China, which is exports. Mostly because we export almost nothing to China. In 2017 we imported N1.8tn worth of stuff from China and exported only about N220bn worth of stuff to them, mostly crude oil and natural gas, and some wood. The damning statistic again.


NB. I do not subscribe to Trumponomics. The net trade with any particular country does not matter much. What matters is the net trade with all countries.



Finally the inflation slowdown continues. The latest release sees it drop to 12.48 percent in April on a year-on-year basis. Which is as expected given the base effects.


The graph above tells the whole story. Who could have guessed that getting the currency problems out of the way would restore macroeconomic stability. There’s a quote from Petyr ‘Littlefinger’ Baelish that captures the message but it may not be politically correct to repeat here. It can be summarized as this: when you find your economy in a currency crisis, best to let things adjust and get it over with. Inflation will go up of course but then it will come back down again. Don’t let it drag on for long like we did, pulling the economy down with it.


Of course despite heading towards a more stable macro-environment we are still prone to the scenario repeating itself. No thanks to that damning statistic.


What is this damning statistic I keep mentioning?
95% of our exports is still only crude oil and natural gas. So once the price of that coughs…..


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