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