The Nigeria-China Currency Deal: How does it affect you?
The Nigeria-China Deal: How does it affect you?
The Nigeria-China currency swap implies that China would set aside billions of dollars equivalent of its currency (the Renminbi) from which Nigerian importers could directly exchange their naira at pre-determined exchange rates, without first procuring dollars to complete the transaction.
Foreign Affairs Minister, Geoffrey Onyeama, suggested that the celebrated agreement was not a ‘currency swap’ as widely reported, but a recruitment of Nigeria into a partnership ‘that would facilitate China’s drive to internationalise its currency’. ‘So, for us, according to Onyeama, it has given us (our economy) greater opportunity, so that those people (who cannot readily access dollars) can now also import, notwithstanding the shortage of dollars.’[i]
A senior official of the Chinese Foreign Ministry, Lin Songtian, noted that the deal entails that the Renminbi is free to flow among different banks in Nigeria, and the Renminbi has been included in the foreign exchange reserves of Nigeria.
The Central Bank of Nigeria Governor, Godwin Emefiele mentioned that ‘we are working to encourage our exports of raw materials to China to reduce the trade imbalance’ which is presently, clearly, heavily skewed against Nigeria with an annual import bill of about $15 billion payable to China.’
The National Bureau of Statistics (NBS) indicated that merchandise trade between China and Nigeria reached a record high of N2 trillion in 2017 (8.7% of total merchandise trade), thus making China Nigeria’s third largest trading partner after India and the United States (accounting for 12.5% and 10.8% of merchandise trade respectively. But this relationship so far has been lopsided with Chinese imports accounting for a major chunk of the transaction.
However, here are some major benefits of this deal. It will:
- Minimize the challenges encountered in search of third currencies during business transactions between Nigeria and China.
- Provide Yuan liquidity to Nigerian businesses and naira liquidity to the Chinese businesses, thus, facilitating speed, convenience and volume of transactions between both nations.
- Ease importation of machinery and raw materials for most Nigerian manufacturers, especially those in the SME subsector
- Reduce currency transaction cost for importers and ease foreign exchange (forex) liquidity pressure in Nigeria.
On the flip side, this arrangement, though increasing the value of Chinese exports to Nigeria, it will, unfortunately, also challenge Nigeria’s desire to diversify its economy by adding value to its local agricultural and raw materials output.
In addition, the Chinese buying houses with surplus naira liquidity in Nigeria may outbid indigenous companies to monopolise supply sources of our agricultural and raw materials and eventually cart this away to China as exports for processing into finished products which will be re-exported to Nigeria at much higher cost. This would be counterproductive to Nigeria’s quest to become a robust industrial economy through adding value to our agricultural and raw material products before export.
While we applaud another interesting initiative by the Federal Government towards improving the macro-economic outlook of the country, we recommend that the swap deal be frequently monitored and evaluated to ensure it achieves the greater good for the Nigerian businesses and the economy at large.
Christian Egwuogu is a Business Analyst at ACIOE Associates where he leads engagements in Information and Communication Technology, while also leading other key projects.
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