Nigeria: The Implications Of The Acceptance Of The Naira As A Trade Currency By The United Kingdom

Last Updated: 15 February 2018
Article by Obi Ugochukwu
Most Popular Article in Nigeria, March 2018

Recently, UK Export Finance; the United Kingdom's export credit agency, added the Naira to its list of pre-approved currencies. This development brings Nigeria into the league of other African countries like Egypt, Kenya, Mauritius, South Africa and Uganda who also enjoy this privilege. This development comes about two (2) years after the UK exited the European Union.

It is important to understand what this development will mean for Nigerian businesses, as well as its overall implications for the Nigerian Economy.

First, it should be noted that the acceptance of the Naira by the British government, does not mean that the Naira now qualifies as a legal tender in the UK. This arrangement between the two countries, strictly relates to trade finance. Put differently, the arrangement is for importers only, and does not qualify for retail and debit card transactions. To be eligible under this program, the minimum transaction value for exports to Nigeria is £5 million (Five Million Pounds); in its Naira equivalent. This allows the Nigerian importer to approach a Nigerian bank, and, effectively, pay the Naira equivalent of goods purchased, directly to the UK exporters.

The big question since this deal was announced, has been what will be the exchange rate? This has not yet been finally resolved. It has however been agreed, that both the UK and Nigerian governments, will come together and reach an agreement on the question of rate of exchange. It is also a part of the agreement between the countries, that any Nigerian importer who does not have the required (minimum) cash to pay for his import, can access a loan of at least 85 percent of the contract sum, from a Nigerian bank. The importers are, however, expected to provide a cash advance for the initial 15%. The loans will be denominated in Naira and will attract interest at the prevailing Nigeria Interbank Offered Rate (NIBOR) or Monetary Policy Rate (MPR). The loans, to be disbursed by Nigerian banks, will also be guaranteed by the UK Export Finance; in case the Nigerian importer defaults, thereby reducing their credit risks. The tenure of the loan will be for a maximum term of two (2) years only.

This arrangement, put simply, is to the effect that if for example, a Nigerian importer buys a 24 feet container laden with electrical equipment, he can pay in Naira at a Nigerian bank, and the foreign exchange risk will, in effect, be transferred to the Nigerian Government; who then bears the risk of ensuring that the foreign currency is available.

A diagrammatic chart of how the process would work is shown below.

There are implications that this arrangement portends. One of its benefits, is that it would enhance the ability of Nigerian importers to import and buy British goods in Naira; rather than being saddled with the burden of sourcing for British Pounds Sterling. This will remove some of the barriers to trade between the two countries, and greatly enhance capital inflow. Furthermore, it will enable Nigerian businesses to manage foreign exchange risks and, more frequently, to negotiate better terms with Nigerian banks.

The Nigeria-British Chamber of Commerce has recently projected that trade volumes for UK - Nigeria trade, could exceed N7.7 trillion (£20 billion) by 2020. With this bilateral trade deal now existing between the UK and Nigerian Governments, this figure is expected to increase astronomically. Under the present trade regime, the Nigerian manufacturer/importer who intends to import goods or machinery from the UK, would ordinarily approach Nigerian Banks to open and fund Letters of Credit (LC); either in US Dollars or British Pounds Sterling. This process has been characterised by unnecessarily lengthy delays for Nigerian manufacturers and importers in funding their LCs, due to difficulties and challenges in securing foreign exchange denominated currencies from authorized dealer banks in Nigeria. However, with this new trade arrangement, Nigerian manufacturers and importers will easily avoid such delays, and finance their trade (i.e. fund their LCs) with the Naira. This is a milestone for Nigerian businesses and will alleviate the economic burden of sourcing for foreign exchange. In sum, the unbridled demand for British Pounds Sterling as a source of foreign trade exchange, will be a thing of the past under this new trade deal.

However, on the reverse side of what seems to be a win-win deal, it is possible, in the long term, that this arrangement might increase Nigeria's forex liability overall. When the trades under this deal mature for settlement, the global exchange rate may not be favourable. The Nigerian government would be locked in to honour the forex obligations all the same and may not be able to conclude better deals that will be in the overall best interest of the country.

In conclusion, while this development presents an open door for better and improved trade relations between the two countries, the Nigerian government may yet need to introduce some measures to monitor and control trade volumes, to ensure that the arrangement always tilts favourably for the benefit of all Nigerians.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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