Nigeria and china entered a currency swap deal last year but up till now many Nigerians still do not understand the implications and the benefits of the deal. A large number of them believed it would create an influx of the Yuan in Nigerians’ money market. Others expressed the fear it could replace the Naira as local currency while to many others it would reduce inflation due to expected influx of Chinese products and lower exchange rate between the Naira and the Dollar.
Many had enormously thought the deal would create a glut of the Dollar in the money market due to expected low demand, and excess supply as many rich Nigerians were expected to be forced to push all they hoarded in private vault into the market for fear of depreciation. But today many are disappointed as inflation has failed to nose dive and Dollar continued to gain strength against the Naira.
The Naira – Yuan Currency swap deal between Nigeria and China simply means that the Chinese Yuan would begin to rank with the Dollar, Euro and to an extent the Pound Sterling. The Peoples Bank Of China could now place a deposit of 15 Billion Yuan, the worth of the deal, with the Central Bank of Nigeria, which will thereafter conduct a biweekly auction to sell Yuan to licensed banks that will in turn sell to customers who wish to import goods from China under the currency swap regime. Nigerian banks are expected to open letters of credit in Yuan instead of Dollar, Euro and Pound Sterling.
The swap deal involved up to $2.4b or N 720 Billion or 15 Billion Yuan and it is conceived to boost trade as it is expected to reduce need to use Dollar for trading. The deal, which is expected to last for three years and subject to renewal, is expected to provide Naira Liquidity to Chinese Businessmen and renminbi Liquidity for Nigeria businessmen thereby improving the speed, convenience and volume of transactions between the two countries.
It will allow Nigerian companies to import spare parts and raw materials by Sourcing renminbi from local banks and help them avoid the difficulties of seeking other scarce foreign currencies. The deal is very significant because China is Nigeria’s second-biggest trading partner after the United States with volume between the two countries totaling $9.2b in 2017 according to Blooborge. During the period, Nigerians runs a deficit, importing N 7.6b of goods including textiles and machinery from China and exporting just $1.6b, mainly crude oil and gas.
As Nigerians continue to wait for the benefits of the swap deal, their hope continue to dim as days gone by, the exchange rate which crashed to N357 to the Dollar between January and March has gone up again to N360 to the Dollar in unorthodox market. Inflation refuses to nose dive and the country’s economy is yet to be impacted positively.
The whole idea “ between Nigeria and China is to ensure currency Liquidity in bilateral trade between the two countries
Henry Boyo, a financial expert and public financial commentator, in recent interview with a national newspaper, painted a gloomy future of the economy as a result of the swap deal.
According to him, the accumulation of the Naira in hands of the Chinese businessmen could hurt the industries and “our hope of economic diversification”, he said, adding that “this is a real possibility if it’s not properly managed to reflect Nigeria’s true interest.”
He said the Naira may face the risk of further devaluation and the country’s economy may buckle at the knee of Chinese as a result of huge cache of Naira. “Furthermore, in the spirit of Liberalism towards China, Chinese banks may also formerly established in Nigeria” adding that in such event , Nigeria economy may become denominated by the Chinese and consequently “Chinese – Nigeria banks could consolidate their hold on our economy by legitimacy and directly burrowing more Naira from CBN and lending to primary Chinese businessmen to expand their activities in more areas of business including stock market, government’s bills and bond and other lucrative local investment throughout Nigeria”.
Continuing, he said, “It was never the CBN expectation that the Naira/Yuan deal would restrain inflation nor reduce stronger rate. The Naira rate is not a function of inadequate Dollar reserves or Yuan reserves, but actually a function of surplus supply of the Naira and regular auctions of Dollar ratios by CBN. Unfortunately; the Naira – Yuan deal may further increase the challenge of systematic Naira excess.”
Other financial analysts said the swap agreement will see both countries bank make liquidity available in their respective currencies for facilitation and promotion of trade and investment between the two countries through purchase, sale and subsequent repurchase and sale of Chinese Yuan against the Naira and vice versa. They said CBN expected the deal to ease the pressure on the Dollar to induce stability or a stronger Naira exchange rate.
The Director General, Lagos Chamber of Commerce and Industry (LCCI), Mr Muda Yusuf said the swap deal has not made any impact on the foreign exchange market. According to him, the stability in the market can be attributed to increased portfolio inflow, high oil price and tight monetary environment which have affected the demand for forex.
“The whole idea of currency swap between Nigeria and China is to ensure currency Liquidity in bi-lateral trade between the two countries. The value of swap signed by the Central Bank of Nigeria and The Peoples Bank of China is $2.5b. The swap is for 3 years”, he said.
Continuing, he said: Given the currency value of trade between Nigeria and China at $15b in 2018, the value of the swap is not really significant.
According to him expectation was that the swap would enhance trade between the two countries besides the eradication of an intermediary currency such as Dollar to consummate bi-lateral trade transaction between Nigeria and China. In this case, the volatility and the related challenges may not affect the flow of trade between the two countries.
The LCCI boss said for the swap deal to be sustainable, the macroeconomic environment would need to be stable and to be supported with credible and transparent exchange rate policy, while inflation rate would need to be further moderated in addition to the need to keep fiscal deficit low. “It is important as well to ensure the convergence of different rates in foreign exchange market. All of these are critical success factors for the currency swap deal. ”
To the president of the Association of Bureau de Change operators of Nigeria, Mr. Aminu Guadabe the currency swap would promote transparency among Chinese with their Nigerian business partners.
Chinese imports would crash as charges on third currency transaction would not be wiped out between Nigeria and China. It will also enhance transparency of Chinese suppliers to our Nigerian importers. The Chinese suppliers hide under dollar transaction to extort most of our importers. They hardly want to invoice in Yuan and now it is compulsory.
Be as it may, the average Nigerians yearns for significant appreciation of the Naira below the N360 to the Dollar mark at the parallel market. They are also looking forward to improve condition of living orchestrated by a drop in the country’s inflation rate as a result of the currency swap.