The recent decision by Britain’s export finance agency to add the Nigerian naira to its list of “pre-approved currencies” marks a significant development in the trade relationship between the United Kingdom and Nigeria. This move is expected to have several implications for the Nigerian economy, both positive and potentially challenging, as explored below:
- Boost to Trade and Investment: The inclusion of the naira in the pre-approved currencies list is a clear signal of the UK’s commitment to strengthening trade and investment ties with Nigeria. By allowing financing for transactions denominated in the local currency, the UK is facilitating trade between Nigerian businesses and British exporters. This could lead to an increase in bilateral trade volumes, promoting economic activity in both countries.
- Easing Forex Constraints: In the past, Nigerian importers faced challenges accessing foreign exchange due to severe dollar shortages, particularly during the 2016 currency crisis caused by lower oil prices. With the UK government-backed guarantee to facilitate naira financing, Nigerian importers will now have a more reliable and stable option to buy British goods, reducing their exposure to foreign exchange risks.
- Liability Concerns: While the financing option in naira offers advantages to Nigerian importers, there are concerns regarding potential liability for the Nigerian government. As trades mature for settlement, there may be pressure on the Nigerian government to ensure timely and sufficient remittance of funds to the UK to honor the transactions. This could put additional strain on the country’s foreign exchange reserves and financial resources.
- Impact on Nigerian Interest Rates: Local interest rates in Nigeria have historically been in high double-digits. The arrangement with the UK Export Finance, which likely involves interest charges on the financed transactions, could add further pressure to domestic interest rates. The Central Bank of Nigeria may need to carefully manage interest rates to avoid any adverse effects on borrowing costs and overall economic growth.
- Strengthening the Naira: With the naira being one of the pre-approved currencies, its demand may increase as more Nigerian businesses opt for transactions in the local currency. The increased demand, coupled with a government-backed guarantee, could lead to improved confidence in the naira, potentially stabilizing its value and exchange rates in the international market.
- Encouraging British Investment: The financing option provided by the UK Export Finance could encourage British businesses to invest in Nigeria. With the backing of the UK government and reduced foreign exchange risks, British investors may find it more attractive to participate in projects and ventures in Nigeria, contributing to job creation and economic development.
In conclusion, the inclusion of the naira in Britain’s pre-approved currencies list holds significant promise for the Nigerian economy. It can lead to a boost in trade and investment, ease foreign exchange constraints for Nigerian importers, and enhance the value and stability of the naira. However, it also poses challenges related to liability and potential impacts on interest rates. The success of this arrangement will depend on effective coordination between the UK and Nigerian authorities to ensure smooth transactions and minimize any adverse effects on the Nigerian economy. As both countries navigate their post-Brexit trade relationships, this step represents a valuable opportunity for Nigeria to strengthen its economic ties with the United Kingdom.