By Ehiwe O. Sam ESQ.
Just recently, the UK Export Finance 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 is coming up roughly two (2) years after the UK exited the European Union.
It is important to understand what this recent development represents as well as its overall implications to 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, this arrangement is for importers 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 in Naira equivalent, and it allows the Nigerian importer to approach a Nigerian bank and pay the Naira equivalent of goods purchased directly to the UK exporters.
The big question is, what will be the exchange rate? This has not yet been sorted out. It has been agreed that both UK and Nigerian Governments will come together and reach an agreement as to what the exchange rate would be. Furthermore, it is a part of the agreement 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 the Nigerian bank. The importers are, however, expected to provide cash advance for the initial 15%.
The loans will be denominated in Naira and will attract interest at the prevailing NIBOR or MPR. The loans disbursed by the Nigerian banks will be guaranteed by the UK Export Finance in event the Nigerian importer defaults thus reducing their credit risks. The tenure of the loan is for a maximum term of two (2) years only.
The arrangement, put simply, is to the effect that if a Nigerian importer buys a 24 feet container laden with electrical equipment, he can pay in Naira 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.
There are implications that this arrangement signifies. One of its benefits is that it would help Nigerian importers to purchase British goods in Naira rather than pay in the British Pounds Sterling. This is because some of the barriers to trade will be removed by this deal and capital inflow will be greatly enhanced. Also, it can enable Nigerian businesses to manage foreign exchange risks and, many times, to negotiate better terms with the Nigerian banks.
Just recently, the UK Export Finance 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 is coming up roughly two (2) years after the UK exited the European Union.
It is important to understand what this recent development represents as well as its overall implications to 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, this arrangement is for importers 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 in Naira equivalent, and it allows the Nigerian importer to approach a Nigerian bank and pay the Naira equivalent of goods purchased directly to the UK exporters.
The big question is, what will be the exchange rate? This has not yet been sorted out. It has been agreed that both UK and Nigerian Governments will come together and reach an agreement as to what the exchange rate would be. Furthermore, it is a part of the agreement 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 the Nigerian bank. The importers are, however, expected to provide cash advance for the initial 15%.
The loans will be denominated in Naira and will attract interest at the prevailing NIBOR or MPR. The loans disbursed by the Nigerian banks will be guaranteed by the UK Export Finance in event the Nigerian importer defaults thus reducing their credit risks. The tenure of the loan is for a maximum term of two (2) years only.
The arrangement, put simply, is to the effect that if a Nigerian importer buys a 24 feet container laden with electrical equipment, he can pay in Naira 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.
There are implications that this arrangement signifies. One of its benefits is that it would help Nigerian importers to purchase British goods in Naira rather than pay in the British Pounds Sterling. This is because some of the barriers to trade will be removed by this deal and capital inflow will be greatly enhanced. Also, it can enable Nigerian businesses to manage foreign exchange risks and, many times, to negotiate better terms with the Nigerian banks.
Further to that, Currently, the trade volume projection for the UK-Nigeria trade as projected by the Nigeria-British Chamber of commerce is that it could exceed N7.7 trillion (£20 billion) by 2020. Now, with the recent acceptance of the Naira as a trade currency in the UK, this figure is bound to increase astronomically. This is so because, under the previous trade regime, the Nigerian importer who intends to import goods would have to ordinarily create an LC. Such LC will be funded by the importer in dollar or pounds. Now, with the relative unavailability of FOREX in Nigeria following the recent fall in oil prices a delay may be occasioned on the part of the importer to secure FOREX which will be used to fund the Letters of Credit, but with the new trade arrangement, Nigerian importers will now be able to by-pass such delays as they came now finance their trade with the Naira currency. This will be so beneficial to the trader in the sense that relieves him of the economic time that would have been spent to source for FOREX as the demand for pounds as a source of exchange would no longer be necessary with the acceptance of the Naira.
However, on the negative side, it is necessary to consider the fact that in the long term, it might increase Nigeria’s liability as trades mature for settlement and the exchange rate may not be favourable as the Nigerian government 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 should also be very careful and ensure that the arrangement tilts favourably to the benefit of Nigeria.
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