Without the reforms that alter this balance, the CBN’s recent swap might simply end up as one of the many (eventually unpayable) debts ratcheted up by the Buhari administration. One which we would have to pay on maturity, without having worked to make it easy for the economy to meet.
A currency swap involves the exchange of principal and interest in one currency for principal and interest in another. Simple. Except that in this case, agreeing on the swap has taken an overtly long time.
Nonetheless, on the back of news reports last week, that the People’s Bank of China (PBoC) and the Central Bank of Nigeria (CBN) had finally agreed on a bilateral currency swap equivalent to ¥15 billion:N720 billion, the more important questions are “Why?”, and “At what terms?” A part of the why is easy to answer. The PBoC’s website describes the facility as required for “facilitating bilateral trade and direct investment, and safeguarding financial market stability in both countries”. The CBN, on the other hand, has not had much to say, yet, about what the Nigerian economy needs the deal for.
Now, this is important. China is a roughly US$23.17 trillion economy (estimated at purchasing power parity for end-2017). And against a backdrop that is broad and increasingly nuanced, it is hard to see how a US$2.4 billion swap (that’s the dollar equivalent) would safeguard its financial market. But to the extent that this money is available to the Nigerian economy (it would soon show up in our gross foreign exchange reserves as an “accretion”), it does support our own financial market, if not the economy. At a time when tighter global financing conditions and heightened domestic political risk may force some non-resident portfolio investors to decamp, it wouldn’t hurt to have more dry gunpowder in our monetary policy arsenal.
But at what cost?
For we have simply borrowed in the Chinese currency (while pledging our own currency as collateral). Over the three-year course of the swap, both parties will exchange interest payments (usually these are priced at the London Interbank Offered Rate — LIBOR); and at the end of the three years, both parties may either exchange both principal and final interest payment or renegotiate the swap. While we may have to wait on the CBN for details of the coupon on the transaction, the implied exchange rate of the swap is ¥0.021:N1. How important is it that this is at a discount to the prevailing exchange rate at late evening Friday (¥0.018:N1)? Not to worry. It does mean that in three years’ time, we will have to return ¥15 billion to the PBoC at the implied exchange rate.
The economy is, however, not productive enough to support even this level of borrowing. Currently, government earns just enough to cover the cost of servicing its debt. Most times, conversation about the cost to the economy of managing our rising borrowing is discussed in terms of government’s low tax take.
In order to come off the swap better than we went into it, the yuan’s exchange rate to the naira shouldn’t appreciate by too much, and the economy should return output growth rates in excess of the coupon on the yuan.
It doesn’t matter, therefore, how big the size of this swap is. What matters is what we do with the money. Primarily, it will be important that we create value with it, such that we are able to continue to pay the interest rate on the swap and are in a position at the end of the term to return the yuan component profitably. At less than 20 percent of domestic output, the economy’s debt is well within the threshold for frontier economies. Indeed, on this measure we may be under-borrowed.
The economy is, however, not productive enough to support even this level of borrowing. Currently, government earns just enough to cover the cost of servicing its debt. Most times, conversation about the cost to the economy of managing our rising borrowing is discussed in terms of government’s low tax take. “Nigerians don’t pay enough tax”, it is argued. But given that the value added tax is an ineluctable payment for those goods and services on which it is applied, this is not exactly a statement of truth. We may not pay tax on all corporate and personal earnings, however. But we are not exactly a tax-remiss people.
It would seem that the same failure of infrastructure and governance capabilities that have held back domestic productivity may be hurting the economy’s ability to boost its tax earnings. One recent estimate of the country’s GDP per hour worked put this at US$3.78 (against Norway’s US$3.7875.08). This suggests that the far bigger reform effort needed to increase the economy’s resilience is one which boosts its ratio of output-to-input.
Our current difficulty in realising these outcomes is that these perspectives run counter to the instincts of the incumbent government — nativist, protectionist, and dirigiste. Persuaded that the public sector must be the engine of domestic growth, the Buhari administration has continued to borrow against its lofty, albeit misplaced aspirations.
How do we increase the output per worker in the country? Of course, we could start by reducing the currently abysmal levels of unemployment. And then ensuring that we obtain more per employee effort than we currently do.
Basically, this challenge involves the management of the nation doing three things. We must improve access to education, and the content of school curricula. We are also required to improve health sector outcomes. And then create space for the private sector. The latter inevitably involves de-risking the economy so that it becomes more attractive to private sector investors (both resident and non-resident). The latter reform direction is as much about strengthening the rule of law as it is about constricting the public sector’s overly broad footprint.
Our current difficulty in realising these outcomes is that these perspectives run counter to the instincts of the incumbent government — nativist, protectionist, and dirigiste. Persuaded that the public sector must be the engine of domestic growth, the Buhari administration has continued to borrow against its lofty, albeit misplaced aspirations. Unfortunately, government’s appetite for borrowing has simply crowded out private sector credit growth.
Without the reforms that alter this balance, the CBN’s recent swap might simply end up as one of the many (eventually unpayable) debts ratcheted up by the Buhari administration. One which we would have to pay on maturity, without having worked to make it easy for the economy to meet.
Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.
