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‘Gains, pitfalls of Nigeria’s currency swap deal with China’

Bank of China

Bank of China

Divided stakeholders say policy may ease business, stifle local firms

For diverse stakeholders in the 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 at the parallel market.

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

Besides, the deal, according to Presidency sources, has the potenrial of shoring up the value of the nation’s currency, in the foreign exchange market, through a concomitant emergent bidding scheme, with strategic reduced demand for dollar and other major currencies, other than the yuan.

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.

But pessimists pointed out that the swap deal was not consummated between the two countries’ apex banks but between Central Bank of Nigeria (CBN) and China’s ICBC- the world’s largest lender by total assets and market capitalisation. “While this may not affect the objectives of the swap deal in any way, it raises some fundamental sovereign issues,” according to an analyst who spoke on condition of anonymity.

The Managing Director/Chief Executive Officer of Cowrie Investment Limited, Johnson Chukwu explained that the currency swap scheme would address , on a short-term basis, the current liquidity challenge in the nation’s foreign exchange market.
He said: “I think that Nigeria’s overriding objective for the currency swap is to address short-term foreign currency liquidity challenges which has led to CBN’s inability to meet foreign currency demands. With the currency swap, depending on the value, a significant portion of Nigeria’s import bills from China would now be denominated and settled in yuan, thereby reducing the demand for dollar by Nigeria’s importers. “

However, he pointed out that “the major draw back to the currency swap policy is that an unrestricted access to yuan, at an overvalued naira exchange rate, if the N30/RMB is the agreed exchange rate, will certainly encourage importation and stifle local production of goods.

“I suggest that the Federal Government should try and incorporate a strategy similar to that of the cement industry policy, which would require some of the imports from China to be produced locally after a defined timeline, particularly if Nigeria has relative manufacturing advantage for such products. Examples that can readily come to mind include textiles, plastics, ceramics, among others.”

He explained that “the gain of inclusion of Chinese Yuan as part of Nigerian reserve currency was done about five years ago by the immediate past CBN governor, principally to diversify the reserve and reduce the currency risk associated with the U.S. dollar.

“That action was taken at a time when the U.S. economy was particularly vulnerable due to the weakness of their economy after the global financial crises triggered by sub-prime mortgage.”

In his reaction, the National President, National Palm Produce Association of Nigeria (NPPAN), Henry Olatujoye, welcomed the currency swap deal, describing it as “a fantastic measure that would significantly reduce the increasing pressure on the U.S. dollar, which has gone haywire in the foreign exchange market.”

According to Olatujoye , the decision has the capacity of bringing double investment to the country from China on one hand and from the U.S. on the other.

According to him, with the expected ease on the pressure on the dollar, it would bring down the value of the dollar in relation to the naira, which he said would now make it possible for American investors to invest in the Nigerian economy again.

In his view, the current high rate of the dollar in Nigeria had in recent months discouraged American and Western investors in the Nigerian economy.

The NPPAN president allayed any fear that the decision could lead to the higher importation of Chinese goods into Nigeria, citing the economic rivalry or currency war between China and America.

He, however, expressed the fear that European countries may not be well disposed to it because it is capable of adversely affecting their trade balance with Nigeria, warning that their stakeholders could frustrate the move.

The Chairman, Mobile Software Solution, Chris Uwaje, believed that the naira to yuan swap agreement should reduce the pressure on the naira if properly implemented.

According to him, the agreement if it becomes a reality, means that the de facto currency, dollar , will no longer hold on the import and export deals between Nigeria and China.

Uwaje continued: “We don’t need to use dollar to pay because it’s going to be costlier, we pay with yuan. By so doing we avoid every form of round tripping.”

Uwaje urged Buhari’s economic team to see how the country can indeed leverage on the technology prowess of China for Nigeria to attain a sustainable economy.

According to Gbade Buraimoh, a Lagos-based financial expert, the quest for dollar through banks will definitely reduce, as all transactions between Nigeria and China will be in yuan instead of dollar.

He observed that oil sales from Nigeria to China would be settled in Chinese currency, stressing that access to yuan would also be easier.

“The swap will eliminate challenges arising from transactions with the dollar and promote business flexibility between Nigerian and Chinese,’’ Buraimoh explained.

The Director-General of Lagos Chamber of Commerce and Industry, Muda Yusuf agreed that the swap deal would smoothen the payment system in the bilateral trade between the two countries but stressed that it might not really strengthen the naira in the foreign exchange market, as the nation would have to enhance its productive base to achieve that.

An Abuja-based international affairs and diplomacy expert, Kadiri Abdulrahman, viewed the currency swap deal as a positive move towards enhancing the value of the naira, thereby improving access to cheaper foreign exchange, in favour of members of the business community.

The Director- General of the African Affairs Department of China’s Foreign Ministry, Lin Songtian told reporters in Beijing after the agreement was signed by the Governors of Nigeria’s Central bank and the Industrial and Commercial Bank of China Ltd. (ICBC) that the Renminbi (yuan) is free to flow among different banks in Nigeria and has been included in the foreign exchange reserves of Nigeria.

Nigeria is not the first country that China would enter into such an agreement with. The Asian powerhouse has multiple year currency swap agreements of the Renminbi with Argentina, Belarus, Brazil, Hong Kong, Iceland, Indonesia, Malaysia,Singapore, South Korea, United Kingdom and Uzbekistan.

According to the People’s Bank of China (PBoC), those swap agreements were intended not only to “stabilise the international financial market,” but also to “facilitate bilateral trade and investment.”

Meanwhile, the benefit of the currency swap deal and other agreements reached in Beijing during Buhari’s trip to the Far East Asia country has rubbed off on the aviation sector, as a Nigerian carrier, Air Peace announced that it would soon commence scheduled flight to China from Enugu.

Chairman of Air Peace, Allen Onyema revealed at the Enugu Economic Summit that the airline has been made Nigeria’s official flag carrier for the route.

“The government and the flying public created a yearning gap, all the agreements in this country are tilted to one side, the foreign airlines, but this government of Muhammadu Buhari has started to do things differently – recognising the local airlines and seeing that in Air Peace there is a lot of quality, so they decided to give us – when we applied it didn’t take time before they gave it to us,” said Onyema.



19 Comments
  • John Tosh

    Why do you need the American Dollar in trade between China and Nigeria? Most of the consumer products in the USA are made in China. Nigerians are getting the same items that Americans buy in the USA especially in stores like Walmart which has the proud stamp “Made in China”

    So why do you need American Dollars only to use it to buy Chinese RMB? Its crazy. This is how the IMF destroys economies by forcing them to use the Dollar for everything meanwhile restricting access to the Dollar.

    Nigerians get the same quality goods as in the USA from China while Nigeria pays China with oil and local produce.

    My one concern is Fishing in the territories of West Africa by Chinese vessels. They must use methods which replenish the fish, not the destructive process which rakes the bottom of the ocean killing everything on the sea floor.

    Nigerians would still need Dollars to go visit relatives in the USA. The value of the Naira would no longer be manipulated by the IMF using a buy-back process which has depressed the value of the Naira.

    • John

      I see reason to your submission, but you would not fail to rule out teething problems occasionally experienced in newly introduced policies such as this. Give or take we are better-off with the currency swap at least to disentangle our economy from the wicked shackles of the west. Watch and see how rapidly the Nigerian economy would make a 360 degree turnaround….

    • ROTIMI AKINWALE

      Your analyses are both incisive and concise. Thank you for the end-to-end overview. One can only hope that this govt will not only bark but bite too. Any saboteur shd be made to face the full wrath of the law and by so doing deterrence and global best stds will replace the currency round tripping that currently prevails in our foreign trades space.

      • AA

        Sorry, my brother. Currency controls and forcing people to use a weak currency does not grow the economy; it does not provide jobs; it does not reduce or eradicate poverty. Indeed, it weakens businesses and creates more poverty and unemployment. That is why China abandoned communist economic policies as far back as 1978.

        What we need is not a command economy but innovative approaches to wealth creation. Creativity and productivity, not FORCE, is what will work.

    • AA

      “So why do you need American Dollars only to use it to buy Chinese RMB?”

      Because it is US dollars that is most accepted in international business! Because the US economy is still the leading economy in the world. Because the US is still the world’s largest creditor nation. Our currency cannot become desirable as a result of mere legislation. We must be productive and competitive.

      • ade faith

        question is WHY DO YOU NEED DOLLARS TO BUY GOODS FROM CHINA? what economy sense is that other than hegemony of the IMF

  • Abubakar Audu

    Interesting times

  • Concerned Nigerian

    Short term solution to a long term problem. Sooner or later we will not be able to meet up with Yuan demand and we will start thinking of currency swap with Korea. Solution is revive the local manufacturing with enabling policies.

    • Izonebi

      these are only short term, this does not mean our government should forget to create the environment and push policies that will encourage investments in local industries especially in Agriculture, textile, leather and other manufacturing industries. Also our businessmen need to rise up from their mercantilist tendencies to become real entrepreneurs adding value and not just thinking how to make fast money.

    • Izonebi

      with our crave for cheap foreign goods, Alibaba and other Chinese marketer/resellers will become overwhelmed with demands from emergency traders who will rush in to buy things cheaply and then sell to unsuspecting Nigerians at cutthroat prices. I love Nigerians.

    • God bless u my brother. d stress we r experiencing in obtaining dollar will jst be transferred to yuan. whn there was demand for d dollar, naira fell to all major currencies. as d demand for yuan grows, why wouldn’t d naira start another free fall against major currencies. develop local manufacturing capacity. export more than u import.

  • K.G.

    My question i s this, where will the yuan that Nigerians will use to import come from?

  • Olumide Soneye

    Some smart people are already thinking. Official exchange rate of dollar to naira is not the same as that of Black market. The big question is — Is the official exchange rate of yuan to naira and black market going to be the same? I am very sure they will not be the same. If yuan will be easy to get at official rate, what stops Nigerian businessmen from changing the yuan he bought at official rate to dollar and sell it in the black market.

    For the currency swap to work, forex needs to be totally deregulated, otherwise we will be back to square one.

  • Onyewuchi Nze

    This is the only travel of our president that had yielded immediate economic benefit. Nobody can negotiate well from a position of weakness. Considering the uncomfortable position we find our selves in now, this is not a bad deal. If our position improves, we can always call for a review or opt out

    • sammyo

      It is the most irresponsible deals of any useless president, considering that the man and his useless entourage are stark illiterates, ahahahah

  • AA

    Exactly how does it help ur local currency and your local economy when u exchange one foreign currency with another? How do u help Nigeria when all you have done is to help the Chinese spite the Americans? But all this reasoning may not matter to those who are just looking for an excuse to hail their messiah. Sigh.

  • Ebere Eze

    Economics is about common sense. Cheap things are not cheap in the long-run. Everything about the Chinese is cheap but they do not last. The Federal Government is under pressure to impress that they are working, so they are ready to enter into any kind of agreement not minding the long run impact.
    How did the Chinese and other strong economies of the world achieve their strength. It was through internal policies aimed at growth in human capital and industrialization. The exchange rate of our naira to dollar is a reflection of our level of productivity. Why are we under and this pressure of demand for dollars?. Because we are not a producing nation, so we must buy from the international market.
    How can PMB have given almost N1trillion to bail out States to pay salaries, but it cannot do same to bail out the manufacturing sectors. If can give Governors bail out fund, why not give bail out fund to all the companies that are not producing or much more give the Bank of Industry and CBN to give loans at one digit interest to all existing companies that are shut down because of funding
    We are a country under the yoke of consumerism. If we bail out companies they will produce more and sell more and we will earn more monies and our currency will compete with dollars. So, the best way to help this economy is through a long run.

    • ade faith

      partially you are right but the reason to include the yuan as part of our exchange rate and reserve is a welcoming idea but also we must stimulate the economy to be investment ready, the interest rate is damn too high and our roads ,the electricity and water must be in place

  • Akpobome

    Nigerians always looking for short cuts, without going through the pains of patience and hard work. If they are in a traffic jam they just leave the main road and use the sidewalk and then clog the traffic in front by getting in front of those who wants to do the right thing by waiting. The only way our Naira would appreciate is for us to start producing most of what we consume, only import what we need to manufacture our products. To be import dependent is a choice we can overcome.

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