Nigeria’s balanced and diverse relationship with China is key to sustainability

On February 16, Nigeria will go to the polls. While 91 political parties are participating in the election, the two frontrunners are incumbent President Muhammadu Buhari of the ruling-All Progressives Congress (APC), and former Vice-President Atiku Abubaka of the People's Democratic Party (PDP). The key electoral battle grounds will be on the economy and security. Buhari presided over a term in which oil prices collapsed and the country was thrown into recession, while at the same time Boko Haram, a terrorist group in the North East of the country, intensified its attacks.

Nigeria prepares for elections on February 16 2019. Source: [Al Jazeera/Afolabi Sotunde/Reuters]

Nigeria prepares for elections on February 16 2019. Source: [Al Jazeera/Afolabi Sotunde/Reuters]

No talk of a ‘debt trap’ in election campaign

However, unlike recent elections in Malaysia and Pakistan, debate around the role of China is notably absent in Nigeria’s election. Yet, China’s presence in the country is significant; the American Enterprise Institute estimates the value of Chinese investments and construction contracts in Nigeria at $21bn over 2016-18.  

While in other countries, notions around a ‘debt trap’ stemming from Chinese investments have often been the subject of fierce discussion (and in the case of Malaysia actually resulted in a new government rolling back Chinese investments), in Nigeria neither of the frontrunners subscribe to such thinking. Buhari has explicitly rejected such criticisms of Chinese investments, saying: “our country is able to repay loans when due, in keeping with our policy of fiscal prudence and sound housekeeping”. Abubaka and his running mate Peter Obi also see China as a key means to promote industrialization, particularly with regard to developing Nigeria’s SME sector.  Whoever wins the next election, one certainty is that Nigeria will continue to build strong ties with China.

Cooperation between the two countries has accelerated in recent months. At the Forum for China-Africa Cooperation (FOCAC) held in Beijing in September 2018, Nigeria signed $10bn of deals with Chinese companies that contributed to a 30% increase in bilateral trade to $14bn. And, in January 2019, Nigeria signed onto China’s flagship Belt and Road Initiative in anticipation of strengthening economic and financial cooperation.

Nigeria’s balanced and diversified relationship with China

Generally positive attitudes towards China across Nigeria’s political elite are a direct result the balanced and diversified relationship that has developed between the two countries. The country is not reliant on China in any one area of their relationship. We drill down on five key elements of this multi-faceted relationship:

1)    Infrastructure

Nigeria has one of the largest infrastructure deficits in the world; two thirds of the population still does not have access to safe water and over half of the population has no access to reliable electricity. Logistics costs are also extremely high; it costs more to transport a good from Lagos in Nigeria’s South to Kano in the North (1000km), than it does to ship a good from Shanghai to Lagos (over 12,000 km).

Nigeria’s government is investing in infrastructure, but external funding is needed. As cited in the National Integrated Infrastructure Masterplan (NIIMP) developed by Nigeria’s Ministry for Planning in 2015, it is estimated that the country requires $3 trillion over the next 30 years, with $500bn required in the first 10 years. This estimate, which has wide sectoral scope, is reached by comparing Nigeria’s core infrastructure stock of around 20-25% GDP to international benchmarks of around 70%. Yet, even as the government increased its budget allocation for capital expenditure to 30% in 2017, this remains at least 80% short of the annual amount prescribed by NIIMP.

Alongside self-funding new infrastructure, Nigeria has also looked to the World Bank, European Commission and African Development Bank as sources of infrastructure capital. Yet while they might have the risk tolerance and investment horizons, their capital remains diluted over a number of countries. In its 60 years of operation in Nigeria, the World Bank has invested on average $100mn on infrastructure a year – significant but still a drop in the ocean versus Nigeria’s needs.

This is why Nigeria has engaged China and the Belt and Road Initiative. The flagship project was a $500 million railway line from Abuja to Kaduna financed and built by the Chinese. At the same time, upgrading of airport terminals, the Lagos – Kano rail line, the Zungeru hydroelectric power project and fiber cables for internet infrastructure are also being built by Chinese companies.

According to the Nigerian government, the country is currently leveraging Chinese funding to execute $3.4 billion worth of projects at various stages of completion. Jonathan Coker, a former Nigerian ambassador to China, has said that the primary rationale for using Chinese contractors was that: “the cost came out so much cheaper for us than going to the traditional friends such as France, the UK, Canada.”

2)    Security

If there is one thing that unites the vast majority of Nigerians, it is the need to counter insurgency forces in Nigeria’s North East. Boko Haram, labelled as a terrorist organization, has been responsible for thousands of deaths since its rise to prominence a decade ago. Boko Haram’s presence is also becoming a direct threat to Chinese investments and companies active in Nigeria. In December 2018, three Chinese furniture factory workers were killed and their bodies found burnt. Boko Haram and its affiliates are likely to have been responsible. As a result, China and Nigeria have formalized security cooperation through the signing of a recent Memorandum of Understanding. China pledged N2 billion (50 million Yuan) in military equipment and training to help support Nigeria’s  efforts against insurgents in the North East. In doing so, China has been able to win the support of local populations on the ground.  

3)    Manufacturing

While Nigeria is the richest economy in Africa, with the largest population and one of the better educated workforces, 4 in every 10 people still remain unemployed. Nigeria needs more inclusive industrialization that creates jobs for all, as opposed to focusing solely on sectors such as oil. Opportunities lie in the manufacturing sector, which creates more jobs through stronger forward and backwards economic linkages than any other sector.

Nigeria is again leveraging its relationship with China here. Some Chinese manufacturers have started relocating production to Nigeria, partly in response to rising wages in China and to take full advantage of the size of Nigeria’s domestic market. Sun Ceramics is one such example; they produce ceramics the size of 10 football fields every day, employ over 1,000 locals and also source all their raw materials from Nigeria. If it weren’t for Nigeria’s difficult business environment, Chinese firms claim they would commit greater amounts of investment.

Beyond inward investment, China is also sharing best-practice with Nigeria’s manufacturing sector. While Nigeria’s Special Economic Zone (SEZ) program pre-dates China’s, it has failed to deliver the same kind of results. Many zones are dysfunctional and have failed to attract FDI. China’s zones, on the other hand, have been instrumental in developing export sectors and catalyzing industrialization. As a result, Nigeria and China have been undertaking regular exchanges in order to support development of Nigeria’s SEZs. President Buhari has doubled down on his efforts to promote SEZs, and is pushing ahead with "Made In Nigeria for Exports": a plan that leverages SEZs to generate $30bn in annual export earnings and create 1.5 million new jobs by 2025.

4)    Macroeconomic planning and stability

Long term support to the Nigerian economy comes from China’s FDI, but the countries’ relationship extends to short-term policy goals as well. This is best epitomized during Nigeria’s recent recession when Chinese financiers helped avert a currency crisis in Nigeria.  Following the collapse of oil prices, China provided emergency financing to Nigeria and also worked to facilitate bilateral trade and investment through conducting a currency swap worth $2.4 billion. This helped to make trade between the two countries less reliant on the US dollar and therefore less volatile.

5)    Size of Nigeria’s domestic market

Nigeria’s relationship with China is more balanced than many other developing countries as the former knows the size of its domestic market is of great interest to Chinese investors and companies. In the case of other poorer and smaller African nations, whilst China could manufacture there to lower wage costs and drive export growth, their domestic markets are not as compelling as Nigeria’s. Nigeria is already the richest country in Africa in absolute terms, and by 2050 will have the third largest population in the world. Its young and wealthier population will be consuming more; Chinese names like Techno and Huawei have already become commonplace in Nigeria.

The strength of Nigeria’s domestic market therefore gives it more leverage in its relationship with China. That makes the relationship more balanced instead of being purely premised on Chinese financing, construction and resources.

Strong ties to stand the test of the time

It’s no secret that 2018 was a challenging year for China’s Belt and Road Initiative (BRI). BRI was refuted as a ‘geopolitical ploy’ and a ‘debt trap’ by some countries, causing them to adopt more cautious approaches towards China and even scale back the size of Chinese investments. Where engagement with China has taken a turn for the worse, too often it has been a result of a one-dimensional and one-directional relationship with China. That is to say, the relationship with China is premised solely on resources and/or infrastructure; and skewed in favor of China given the greater bargaining power that comes with China’s capital.

Nigeria, however, has managed to buck this trend and build a balanced and more diverse relationship with China. Nigeria’s relationship with China extends beyond resources and infrastructure to security, financial planning and sharing of best-practice in manufacturing, to name a few areas of cooperation. Particularly in the realms of security cooperation; the Chinese have found an area that helps win them local support on the ground in Nigeria given a near-universal desire to eliminate insurgent forces. Nigeria also recognizes that the size of its domestic market offers the largest opportunity in Africa for Chinese companies; and that has helped to improve the balance in the relationship.  

It is this combination of balance and diversification that is key to a sustainable relationship with China. And explains why both of Nigeria’s frontrunners in next week’s election will promote engagement with China, enabling strong ties to stand the test of time.