Friday, March 16, 2018 /8:55 AM /FDC
The United Kingdom Export Finance (UKEF) will provide up to £750m ($1.04bn) in credit financing for Nigerian businesses to purchase goods from the UK.
Today, the European Union (EU) accounts for up to 50% of the UK’s trade. As a member of the EU, the UK is eligible for tariff-free trade, and free movement of its exports. This will be reversed once it exits the European bloc. Tariffs will make exports more expensive, thus less competitive. Britain will also lose some of its negotiation power with non-EU countries.
Although there is a lobby for a partial customs union with the EU, the UK is also looking to secure new trading deals to wade the post Brexit tide- this is where the developing world comes in. This credit financing scheme is also available to over 25 other developing countries, including Sub-Saharan African countries Botswana, Kenya, Mauritius, Nigeria, South Africa and Uganda.
Nigeria is a significant player in UK foreign relations. In the early 2000s, the UK was Nigeria’s largest trading partner, partly due to its colonial and historic ties with the country. Today, however, the country has been knocked from the top spot by the Asian giants (China, India), and the US.
The UK is the fifth largest source of imports into Nigeria, with main imports being machinery (e.g. power generators), and branded products such as luxury vehicles (Land Rover, Jaguar) and pharmaceutical products (GSK, May and Baker).
On the export side, the UK is the sixth biggest destination for Nigerian products. Major exports include rubber, cocoa, and crude oil.
Nigeria also receives significant aid from the British Government and UK-based multinationals towards the achievement of the Sustainable Development Goals (SDGs).
The UK is a hotspot for emigration out of the country, hosting the second largest Nigerian Diaspora in the world. It is no wonder that Diaspora remittances from United Kingdom alone reached $20.8bn, equivalent to 94.5% of total remittances into Nigeria.
Additionally, approximately 18,000 Nigerian students come to the UK each year. This is the third largest origin of international stu-dents after China and India.
What will be the impact?
The concept of loans denominated in local currency is not a new one. It is a common strategy employed by multilateral organizations, development banks, and governments to assist developing countries. The initiative could also encourage other trading partners to introduce similar programs.
The scheme is positive for Nigerian importers, especially those whose costs are in foreign currency, but their earnings are not. With this scheme, enterprises can borrow in naira, and repay in naira, avoiding foreign exchange risks and variable debt costs.
However, the floor of £4.75 million (85% of transaction value, approx N2.37bn) for loans excludes Small to Medium Enterprises (SMEs) from participating in the scheme.
It is unlikely that this scheme could lead to an appreciation in the naira. This is because it merely shifts forex demand from importers to the Federal Government; there is no actual reduction in the demand for forex.
The U.K., however, is the one who stands to benefit the most, as this scheme creates incentives for importers to shift trade to the UK. Thus, it will support demand for British goods and services and boost exports.
In conclusion, the new initiative is positive for the UK, who gets the better half of the bargain. Yet, there are pros for the Nigerian economy such as mitigated currency risks.