Why stronger reserves mean very different things for the world’s second-largest economy and Africa’s most populous nation
BEIJING/ABUJA — China and Nigeria are both enjoying an improvement in their foreign-exchange positions, with their currencies gaining ground against the US dollar. But while the developments offer reassurance for both economies, they reveal a much wider gap in economic capacity between the two countries.
According to Reuters, China’s foreign-exchange reserves rose to US$3.438 trillion in August, up from US$3.419 trillion in July and above the US$3.425 trillion forecast by economists.
Nigeria, meanwhile, has reported external reserves of about US$54 billion, its strongest level in many years, as the naira gains against the dollar.
The figures may appear encouraging for both countries, but the comparison highlights a fundamental difference: China has accumulated reserves alongside enormous industrial and export capacity, while Nigeria is still struggling to build the productive base needed to generate sustainable foreign exchange.
China’s reserves are roughly 64 times larger than Nigeria’s, reflecting not only the size of the two economies but also the depth of China’s manufacturing, export and financial sectors.
China remains one of the world’s leading manufacturing and trading powers, exporting everything from electronics and machinery to vehicles, batteries and industrial equipment. Its vast industrial base generates foreign exchange and provides Beijing with considerable policy options when economic growth slows.
Nigeria’s economic structure is markedly different.
Although Africa’s largest economy has significant oil and gas resources, crude oil remains a major source of foreign exchange earnings. This leaves the country vulnerable to fluctuations in oil prices, production disruptions and changes in global demand.
The recent increase in Nigeria’s reserves is therefore significant. Stronger reserves give the Central Bank of Nigeria greater capacity to support the foreign-exchange market, meet external obligations and cushion the economy against external shocks.
But reserves alone cannot solve the country’s deeper economic problems.
It was gathered that Nigeria continues to face high living costs, weak purchasing power, infrastructure deficits, expensive credit and limited industrial capacity. Many businesses also remain heavily dependent on imported machinery, raw materials and finished goods, creating persistent demand for foreign exchange.
China faces a different kind of challenge.
According to report, the Chinese economy has slowed, with weak domestic demand, a prolonged property-sector crisis and subdued manufacturing activity weighing on growth. Credit expansion has also weakened despite government efforts to encourage lending.
Meanwhile, Beijing has responded by deploying its powerful financial institutions. China has announced about 365 billion yuan, or US$54 billion, in fresh capital for major state-owned banks and insurance companies, seeking to strengthen financial institutions and encourage lending.
The difficulty, however, is that increasing the supply of credit does not necessarily generate stronger economic activity when businesses and households are reluctant to borrow and spend.
This is where the contrast with Nigeria becomes particularly important.
China’s problem is increasingly how to revive a sophisticated economy that already possesses enormous productive capacity. Nigeria’s challenge is to build much of that productive capacity in the first place.
China can draw on its huge manufacturing base, state-owned enterprises, banking system, fiscal resources and enormous foreign-exchange reserves when responding to economic weakness.
Nigeria has considerably less room to manoeuvre.
For Nigeria, the real measure of economic progress should therefore go beyond the size of its reserves or the strength of the naira on any particular day. The more important questions are whether the country is producing more goods for export, increasing oil production sustainably, expanding non-oil exports, improving electricity supply and attracting productive investment.
A stronger reserve position can provide the breathing space required to undertake those reforms. But if reserves are used primarily to defend the currency without addressing the structural weaknesses of the economy, the underlying problems will eventually return.
China’s experience offers an important lesson.
Foreign reserves are valuable because they provide economic insurance. But long-term national wealth comes from productivity, industrialisation, technology, infrastructure, human capital and the ability to produce goods and services that are competitive in global markets.
Nigeria therefore should not measure its economic progress simply by comparing today’s reserve figure with yesterday’s.
The real objective should be to build an economy that does not constantly depend on oil revenues and foreign exchange interventions to maintain stability.
China may be dealing with slowing growth and weak demand, but it has already built the industrial machinery to support a global economic power.
Nigeria is still trying to build that machinery.
The rise in reserves is good news for Nigeria. But the harder task — and the one that will determine the country’s economic future — is turning temporary financial strength into permanent productive strength.
