Monday, August 15, 2022

The Nigeria-China Currency-Swap Deal Explained Fully

The long-awaited currency-swap deal with the Chinese government, which seemed to be on hold for over two years after President Muhamadu Buhari visited China in April 2016, was finally signed on Friday.

The deal was sealed by Godwin Emefiele, Central Bank of Nigeria (CBN) governor and Yi Gang, Peoples Bank of China (PBoC) governor.

The swap deal, expected to last for three years, valued at Renminbi 16 billion or $2.5bn when converted to Dollars, is aimed at boosting trade between the two nations.

A Currency Swap deal between two friendly nations is an agreement by both nations with a substantial trade to swap specific amount of different currencies for a period of time so as to trade in their local currencies without involving the third country currency like US Dollar.

Prior to the drop in prices in 2014, Crude oil accounted for about 90% of the nation’s Foreign Exchange reserves and 70% of government revenue for Nigeria. The plunge in prices of Crude globally caused a great depletion in Nigeria’s foreign reserves thereby triggering a significant shortage of US Dollars in the Foreign Exchange Market.

The foreign exchange market basically provides a platform for sellers and buyers including manufacturers and business owners across international borders to sell and buy in foreign currencies, particularly US Dollar which is currently an international reserves currency.

This means If Nigeria sells a barrel of Crude oil – which costs $75 – the country buying pays the amount into Nigeria’s foreign reserves. Also, a manufacturer who wishes to import from China would have to covert his Naira currency to Dollars and then to Yuan (Chinese Currency) before the purchase can be made.

In simple terms, for every foreign transaction, US Dollar would have to be sourced if bilateral trade deal of this sort does not exist between the two (importing and exporting) nations.

This has put a great deal of pressure on the foreign exchange market, making more Naira pursue the Dollar as people seek the currency to pay their Hospital bills, Schools Fees, importation of raw materials, facilities and other foreign items imported to Nigeria from abroad.
The currency deal has predictably received criticism and applauds from Nigerians as some opine that the efforts would be of immense benefit to China than Nigeria

Now, that the currency-swap deal has been signed between Nigeria and China, the second-largest economy in the world, we therefore examine the inherent implications of this on Nigerian Business and Economy as a whole.

Fall in the Demand of Dollar
According to Bloomberg, the volume of trade between Nigeria and China in 2017 was $9.2 billion, making China the second-largest trading partner of Nigeria after US.

This means importation of goods including textiles, machinery and accessories from China puts more pressure on the demand for Dollar, with the bilateral trade deal, the Chinese Renminbi Yuan can now replace the Dollar for the importation of these products, this will lower the demand for dollar as both countries can now trade without the third party (US Dollar), this will no doubt reduce the continuous intervention of CBN to the foreign exchange market.

Potential Investment Increase
With this development, there would be influx of investors to Nigerian market as the effort would make importation from China to Nigeria easier than ever before, thereby causing increased Foreign Direct Investment by foreign investors and expansion of Nigeria’s local business environment as the Yuan will now be readily accessible by any business owner who is interested in bringing in products from China.

Boost Bilateral Trade Between the Two Countries
The agreement will allow Nigerians who import goods from China to conclude their transactions in Yuan rather than the third party currency (US Dollar).

The CBN in a statement issued by its Spokesman, Isaac Okorafor, said the agreement will make Renminbi (Yuan) available in Nigerian Banks to Nigerian businesses, making access of the Chinese currency easy and convenient, as well as increase the volume of transactions between the two countries.

With this, Nigeria can begin to expect high importation of Chinese-made products into the Nigerian markets as the environment for these importations to thrive has just been made easier with the undervalued Chinese Yuan.
This might, on the other hand, kill the “Buy Nigeria to Grow Nigeria” idea of encouraging local production of Nigerian goods.

A thought that easily comes to mind is, Nigeria could be “a dumping ground for Chinese-products”, However, President Buhari had urged business communities in China not to see “Nigeria as a consuming market alone, but as an investment destination where goods can be manufactured and consumed locally.”

Strengthen Naira Currency
As a matter of fact, the currency deal is expected to strengthen the Naira as the pressure on Dollar continues to drop. However, if effective regulation on the importation of products is not implemented, there could be an uncontrollable influx of imported items into the Nigerian economy and this could be counter-productive.


Ripples Nigeria

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