Nigeria’s Currency Swap with China: Prospects and Implications

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 08-May-2018

For diverse stakeholders in the Nigerian economy, the Federal Government’s recent currency swap deal with China holds both bright prospects and grave implications for Nigeria, even as the naira inched up against the dollar at the weekend parallel market.

President Muhammadu Buhari, during his official trip to the world’s second largest economy, struck a naira and yuan swap deal, scripted to ease trade transactions between both countries and devoid of current exchange challenges with the United States dollar.

The currency swap deal consists of an agreement between two central banks, at least one of which must be an international currency issuer, to swap their currencies. The central banks party to the swap transaction can lend the proceeds of the swap, against collaterals they deem adequate, to the commercial banks within their jurisdiction, to provide them with temporary liquidity in a foreign currency.

The news of the currency swap agreement between Nigeria and China seems to have, immediately, captivated the public attention. Basically, the swap implies that China would set aside billions of dollars equivalent of its currency (the Renminbi) from which Nigerian importers could directly exchange their naira at pre-determined exchange rates, without first procuring dollars to complete the transaction. Regrettably, Nigeria has not published the amount, nor tenor and applicable exchange rates for transactions and settlements under the swap arrangement.

Nonetheless, while briefing State House correspondents on the gains of the China trip, Foreign Affairs Minister, Geoffrey Onyeama, suggested that the celebrated agreement was not a ‘currency swap’ as widely reported, but a recruitment of Nigeria into a partnership ‘that would facilitate China’s drive to internationalise its currency’. So, for Nigerians, according to Onyeama, it has given them (their economy) greater opportunities so that those wannabes who cannot readily access dollars can now also import, notwithstanding the shortage of dollars.

However, Lin Songtian, a senior official of the Chinese Foreign Ministry, also noted that the deal on Yuan transactions ‘means that the Renminbi is free to flow among different banks in Nigeria, and the Renminbi has been included in the foreign exchange reserves of Nigeria’.

In order to facilitate rapid Yuan acceptance in our sub-region, Nigeria as hub, will invariably host a clearing house with affiliation to the People’s Bank of China to allow the Renminbi to become a common settlement currency which can be used for bilateral loans or aid. Ultimately, a new bank with affiliation to the China bank will be established and dedicated to intermediate Yuan transactions in the sub-region, as a product of the currency swap.

Furthermore, China’s official news agency reported that President Xi Jinping had expressed interest in economic co-operation with the Nigerian delegation, particularly in areas like oil refining and mining. However, it is not yet clear if the currency swap deal also implies that China will pay for Nigeria’s crude oil in naira or Yuan.”

Ultimately, this currency deal will bolster our Renminbi reserves, but this may lead to a corresponding drop in our dollar reserves; ironically however, China may readily depreciate its Yuan to promote the export price competitiveness of its products in the United States and other dollar denominated markets. Unfortunately, therefore, Nigeria’s increasing Renminbi reserves would also become devalued and would buy less and less dollars than before. It is instructive that China is already in similar bilateral currency swap agreements totalling RMB 3.137tn (about $500bn) with 31 Central Banks, including the UK and South Africa, and the trade volume with these countries has since exceeded RMB 11tn after the swap agreements.

Nonetheless, according to the CBN Governor’s observation, ‘‘we are working to encourage our exports of raw materials to China in order to reduce the trade imbalance’ which is presently, clearly, heavily skewed against Nigeria with an annual import bill of about $15bn payable to China. However, it is not yet clear how Nigeria’s industrial production and output will ever become internationally competitive enough to reduce this trade imbalance, particularly when domestic inflation rate is trending at over 12 per cent while cost of funds to industries and other businesses presently exceeds 20 per cent”.

Expectedly, this arrangement would increase the value of Chinese exports to Nigeria well beyond the present $15bn, but will unfortunately, also challenge Nigeria’s desire to diversify its economy by adding value to its local agricultural and raw materials output.

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The downside is that the Chinese buying agencies with surplus naira liquidity in Nigeria will outbid local industries to monopolise supply sources of the local agricultural and raw materials and subsequently cart these away to China as exports for processing into a multitude of finished products which will be ultimately re-exported to Nigeria at much higher cost. In contrast, this may be counterproductive to Nigeria’s abiding desire to become a robust industrial economy by adding value to our agricultural and raw material products before export.

The Central Bank of Nigeria should put some measures in place to guide the naira against the yuan because in the short run, the deal is beneficial to Nigeria but on the long run, if certain measures are not put in the place, the economy might see the negative impact of the deal.

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