On the Nigeria-China currency swap deal

Buhari-and-Xi-Jinping

China is the largest export economy in the world and is seen as the next biggest investor in Africa. Gradually the country is pushing to overthrow the United States and United Kingdom pervasive economic influence in Africa. According to the Africa Attractiveness report by Ernst & Young’s (EY), China is the single largest contributor of foreign direct investment (FDI) capital and jobs in Africa. The report states that China invested in 293 FDI projects in Africa since 2005, valued at $66.4 billion and creating 130,750 jobs by the end of 2016. The report further reveals that China’s exports to Africa in 2016 is valued at$82.9 billion while imports from the continent stood at $54.3 billion making the country Africa’s largest trade partner. On the other hand, FDI projects by the US and UK in Africa fell 5.2% and 46.8% respectively signalling the dominance of China in Africa. South Africa, Morocco, Nigeria, Kenya and Egypt accounted for 58% of the continent’s total FDI projectsin 2016.China’s investment is visible across Africa including Nigeria. Whilst Nigeria’s export to China is valued at just about $1.6 billion, mainly oil and gas, the country imported goods worth US$6.92 billionfrom China in 2016 according to data from United Nations COMTRADE database on international trade.

What is clear from the trade analysis between Nigeria-China and other African countries is the exchange of currencies between the countries. Until recently, trade has been executed mostlythrough a third currency, usually dollars which increases the cost of doing business between the countries. This reality led to the exploration of currency swap deal between Nigeria and China just as the country had done with many other trading partners in Africa.A currency swap is simply the exchange of currencies between two parties, and in this case, countries. In 2015, China signed a currency swap deal with South Africa worth $4.8billion in order to eliminate exchange rate pressures. The same deal had earlier been finalised with Egypt in 2014 worth $5billion.

To further advance its business and economic interest in Nigeria, and ensure smooth international trade between the two countries, on Friday, April 27, 2018, the Central Bank of Nigeria (CBN) entered into a three-year currency swap agreement worth $2.4 billion with the Peoples Bank of China (PBOC). This is designed to provide naira liquidity to Chinese businesses and provide renminbi liquidity to Nigerian businesses respectively, thereby improving the speed, convenience and volume of transactions between the two countries. The agreement is valid for three years and can be extended upon mutual consent.The journey to the currency swap agreement could be traced to 2011 when the former CBN Governor, SanusiLamidoSanusiincluded the renminbi (Chinese Yuan) in Nigeria’s foreign exchange reserves as a way of diversifying Nigerian reserves from the dollar, which was continually putting the country’s foreign reserves under pressure every time international crude oil price falls. Today, between 5% and 10% of Nigeria’s foreign reserves is denominated in renminbi (Chinese Yuan). However, the formal negotiations on the latest deal started in 2016.

The CBN in a statement stated that “With the operationalisation of this agreement (currency swap deal), it will be easier for most Nigerian manufacturers, especially small and medium enterprises (SMEs) and cottage industries in manufacturing and export businesses to import raw materials, spare-parts and simple machinery to undertake their businesses by taking advantage of available renminbi liquidity from Nigerian banks without being exposed to the difficulties of seeking other scarce foreign currencies.” On its part, the PBOC,stated that the agreement is designed to smoothen “bilateral trade and direct investment, and safeguarding financial market stability in both countries.” The agreement has received commendations from diverse quarters – economic analysts, businessmen and policy makers. The fundamental significance of the deal is its capacity to make trade between the two countries less reliant on the US dollar. This is important as trade has continued to grow between the two countries since 1971 when formal diplomatic relations were first established. The Deputy Chinese Ambassador to Nigeria, Lin Jing, remarked that China’s bilateral trade with Nigeria in 2017 stood at $12.3 billion, growing by 30% from what it was in 2016.According to the Ambassador, since 2005 when both countries agreed to establish strategic partnerships to promote relations in several areas and enhance continued people-to-people exchanges, trade relations has continued to grow. Currently, Nigeria is the biggest Chinese investment destination in Africa, the second largest export market and the third largest trading partner of China in Africa. Trade relations between the two countries have blossomed to the extent that a new concept of “made in Nigeria with China” which represents collaboration between the two countries in manufacturing is being considered.

Reactions to the currency swap deal have varied from outright excitement to caution and fear of Chinese dominance. In the short term for Nigeria, it will ease the pressure on the nation’s foreign reserves which is usually subjected to the fluctuations in response to the volatility in the international crude oil market. Manufacturers and businessmen, especially those in the Small and Medium Enterprises will be able to access the Chinese Yuan for importation of machineries and other raw materials for their business. It will also reduce the cost of doing business that is involved intransacting with a third currency, and further ease the trade process. It will also eliminate existing barriers in trading between the two countries. Of course this will naturally reflect on time optimization as trade will be faster between the two countries. In a globalised world where investors are looking to maximise time and shorten the processes involved in international trade, this is a great achievement for both countries. Some analysts have also suggested that the deal may lead to a stronger Naira because the demand for the US Dollar by Nigerians importing from China is expected to reduce now that they have access to the Chinese Yuan. Whilst these are laudable advantages, the deal also have potential disadvantages for Nigeria if not well managed.

At the monthly Economic and Financial Markets Outlook, titled“Local Competitiveness and Currency Swap Deal,” the Head, Research, FSDH Merchant Bank, AyodeleAkinwunmi, submits that the agreement may increase importation into Nigeria thereby increasing the existing trade imbalance between the two countries, which is unfavourable to Nigeria. In a similar vein, the president of Progressive Shareholders Association of Nigeria, Mr.Okezie Boniface stated that the deal will “lead to economic dependence despite that Nigeria is a sovereign nation. The policy will lead to the influx of Chinese goods into our country considering that we are contending with weak regulation.” Supporting this argument, Dr Austin Nweze of Pan-Atlantic University advised that the deal may likely encourage Chinese manufacturers to compete with local Nigerian businesses. With superior technology and cheap labour, the Chinese firms certainly have the advantage. In other words, the deal will grow Chinese businesses at the expense of local Nigerian firms. Sharing the same fear, the National Association of Nigerian Traders (NANTS) believes the deal has some benefits; however, it also has some negatives. According to the president of the association, Ken Ukaoha, “The currency swap deal (with its unrestricted access to the Yuan, at an overvalued Naira exchange rate, N30/Yuan) has the propensity to trigger increased volume of imports to the country. The surge in Chinese imports if unchecked, especially given the history of appetite of Nigerians for imported goods, would negate the federal government’s import substitution agenda, stifle domestic production and place local industries in a pitiable and vulnerable condition with attendant effects that would defeat government’s efforts at job creation.”

Manifestly, just like any other trade agreement, the currency swap deal has its advantages and disadvantages. Whilst it will ease trade relations between the two countries and reduce the constant pressure on Nigeria’s foreign reserves, China is poised to take greater advantage of the deal because of its economic strength and manufacturing prowess. Whereas, Nigeria can only hope that China would increase its imports from Nigeria, it is no doubt that import from China to Nigeria will increase exponentially seeing that our businesses are dependent on foreign technology. With high cost of doing business in Nigeria, some businessmen are likely to further request manufacturers in China to produce goods for Nigerian market at a cheaper rate. This may lead to influx of cheap substandard products and threaten local firms.

Nigeria can only take advantage of the deal with greater attention on manufacturing and export promotion. In the immediate, the Nigeria Export Promotion Council (NEPC) can stimulate the interest of exporters in Nigeria and exposed them to the benefits of the deal while the government provides the necessary support. Similarly, we need to tighten our Customs processes to check the influx of substandard goods that may be imported into the country by Nigerian businessmen and their Chinese counterparts. Ultimately, the most potent way to maximise the benefits of the deal is for Nigeria to increase our export. Without export, the deal is calculated to widen the existing trade deficit between Nigeria and China.

 

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