Recently, the Central Bank of Nigeria (CBN) signed a $2.5bn or N720billion (equivalent of Renminbi 16 billion) bilateral currency swap with the People’s Bank of China (PBoC), making Nigeria the third country in Africa (after South Africa and Egypt) to sign such a deal with the Asian country. With this agreement, the two countries will swap the said amount in the next three years. The deal can be extended by mutual consent.
The signing took place last month, one year after President Muhammadu Buhari visited China where both countries had discussed the swap deal. CBN Governor, Mr. Godwin Emefiele, led the Nigerian officials while the Governor of PBoC, Dr Yi Gang, led the Chinese team at the signing ceremony.
The deal is aimed at providing adequate local currency liquidity to Nigerian and Chinese industrialists as well as other businesses, thereby reducing the difficulties encountered in the search for third currencies. Another of the objectives of the deal, which is expected to help Nigeria position itself as a trading hub with China in the West African sub-region, is also to facilitate bilateral trade and investment, promote financial stability and broader economic cooperation between the two countries.
After the US, China is Nigeria’s top trading partner across the world. Since the inclusion of the Chinese currency among basket of reserve currencies that have Special Drawing Rights (SDR), by the International Monetary Fund (IMF), the government of China has continued to see it as a reflection of the importance of its currency in the world’s trading and financial systems. The country’s expanding role in global trade and the substantial increase in the international use and trading of the Renminbi (RMB) has seen it increasingly enter into currency swap agreements with a lot of countries.
Emefiele had noted that as the second largest economy in the world, more and more countries are turning to China for business. In his assessment of the underlying motives for the policy on the part of China, he said that the Asian nation is perceived to be striving to make its currency a convertible global currency like the dollar, British pound sterling, the euro and the Japanese yen. He pointed out that several other countries – developed and emerging markets – with growing trade volumes with China had entered into such currency swaps. The CBN Governor is convinced that the agreement on the currency swap will definitely benefit Nigeria.
From the foregoing, we are persuaded to commend this move by the Nigerian government which we hope will benefit the country immensely. Other key players are also of the opinion that the deal will boost Nigeria’s economy as it will provide adequate local currency liquidity to Nigerian and Chinese companies, thereby enhancing trade between both countries.
It is also expected to help eliminate the challenges associated with having to use a third currency in business transactions between the two countries and further improve the nation’s foreign exchange reserves because, with the opportunity to access Yuan directly from the CBN, there will be less demand for dollars.
In view of the nation’s huge imports from China, this agreement will help in reducing time as well as transaction cost by eliminating third party currency deals. It will also reduce transaction cost and make goods imported from China cheaper to both importers and ultimately, the Nigerian consumer.
However, in our view, a key risk to the agreement is that the ease of transaction with a highly competitive country like China could worsen Nigeria’s balance of trade and weaken domestic manufacturing capacity. We are constrained to advise Nigeria on the need for her to be careful with a country like China that is known for ensuring that it does everything to have access to the economies of other countries but shuts their own doors to imports.
Even with this, it is our firm belief that the CBN would not have signed the deal without considering its benefits to the country.
Moreover, this newspaper wants the federal government to insist that Chinese exports to Nigeria under the agreement should consist mainly of products that are critical to the nation’s manufacturing and real sector. This is to ensure that we protect our local manufacturers, especially in view of the diversification agenda of the current administration.