The drastic drop in the oil price has made it difficult for the Nigerian government to finance the deficit in an ambitious budget for the year 2016, without racking up more debt for the country. Nigeria’s finance minister, Kemi Adeosun, has forecasted a budget deficit of about ₦2.2 trillion ($11 billion). In a bid to plug this gap, President Buhari embarked upon an arms-outstretched-to-receive flight to China and came back with more than what he had set out to get. Mr. President may very well be pleased with his apparent success.
But what is this much discussed trip about, and what has Nigeria actually gotten from it?
According to Mr. Godfrey Onyeama, Nigeria’s foreign minister, a $6 billion loan has been offered as funding for infrastructure projects. These include the construction of a granite mining plant, the Lagos Metro Rail Transit Red Line project, a high-tech industrial park, a solar power facility, as well as others in the housing, power and transportation sectors. As far as the Nigerian government is concerned, this is a fine deal. This view seems to be based upon the relative leniency of the Chinese with respect to terms and conditions for granting loans- it does not require the sort of reforms which the World Bank or the IMF usually would. A no-strings-attached package seems perfect for a country which is adamant about retaining its grip on its currency’s exchange rate, despite calls from Bretton Woods institutions to let the naira float. A smart, commonsensical move- so says the Nigerian government.
However, the fact that the $6 billion dollar loan is about three times the initially expected offer from China of about $2 billion is not necessarily without some serious downsides. Analysts predict that it would be difficult to repay the loan if the oil prices remain at the low side or drop further. An expansion of Nigeria’s external debt is a consequence of this deal which may not be positively addressed anytime soon. It is probably the case that the ₦6 trillion budget was the child of overexcited parents who did not adequately plan for their baby’s growth. It remains to be seen, the extent to which this baby can be helped by China’s generosity.
Other concerns for this deal includes the claim that it does not do much to solve Nigeria’s over-dependence on crude oil exports. At best, what has been proposed is a drop in the ocean of badly needed injections into other sectors of the Nigerian economy. Nevertheless, it was never going to be enough. Reversing the trend of continuous oil dependence will take a long time, and certainly much more than a few billion dollars.
The reported currency swap deal between Nigeria and China (which was noted in some quarters as being one of the agreements reached with the Chinese authorities) has however been denied by Mr. Onyeama. He has insisted that the deal referred to was part of an internationalization of the Yuan and that Nigeria wanted to serve as a hub for the currency in West Africa. This would give Nigeria a little flexibility as far as forex use on the international markets is concerned. The difficulties arising from the scarcity of dollars for such transactions may be mitigated to some extent by using the Yuan as a currency for international trade.