Jideofor Adibe

The talk in town these days is about President Buhari’s recent trip to China and the deals, loans and currency swap that resulted from that trip. Of particular concern to many people, is the reported naira and renminbi (also known as the Yuan) swap deal, which is expected to ease trade transactions between China and Nigeria. But beyond the rhetorics and the obfuscation around technicalities, what is this deal all about? And will it really ‘crash’ the value of the dollar against the naira as some people believe? In this piece, we will look at the pros and cons of the deal and allow the reader to decide for himself or herself.

Basically a currency deal is an agreement between two central banks, at least one of which must be an international currency issuer, to trade in their own local currencies and pay for import and export trade at pre-determined rates of exchange without the use of a third currency such as the United States dollar or the British pounds. Usually the aim of a currency swap deal is to provide the parties with temporary liquidity in foreign currency. One peculiarity of Buhari’s deal with China however is that it was not cemented between the Central Bank of Nigeria and its Chinese equivalent, the Peoples Bank of China (PBoC), but with the Industrial and Commercial Bank of China (ICBC), the world’s largest lender by total assets and market capitalisation. It is not clear why the deal is not between the CBN and PBoC just as information on the nature, size, duration, effective commencement date, the cost of the deal and the interest rate are not yet in the public domain.

It is important to underline that Nigeria is not the only country to have signed such a currency swap deal with China.  In fact since 2008, China has signed such a deal with nearly 30 countries, with the biggest of such deals being the 400 billion Yuan currency swap with Hong Kong in November 2014. In April 2015, the South African Reserve Bank announced it had signed a three-year bilateral swap agreement with the People’s Bank of China for the exchange of local currencies of up to R57 billion.  In fact since 2014 when the Yuan was recognised as a likely global reserve currency, Ghana, South Africa and Zimbabwe have integrated the currency into their financial markets.

In many ways Buhari’s recent currency swap deal is a continuation of the moves initiated by Sanusi Lamido Sanusi, the current Emir of Kano, when he was the Governor of the CBN. It would be recalled that in 2011 Sanusi had indicated that a small percentage of the country’s foreign reserves would be held in the Chinese Yuan. At the time, the country’s $32 billion in reserves were held 79 percent in dollars and the rest in Euros and Swiss francs. As late as 2014, then CBN’s Deputy Governor Kingsley Moghalu was reported as saying that the CBN was looking to increase the percentage of Yuan foreign reserves in its possession from 2 percent to 7 percent. Moghalu was further quoted as saying: “It was clear to us that the future of international economics and trade will shift in large part to business with and by China. Ultimately the renminbi (Yuan) is likely to become a global convertible currency.”

Potential benefits

For supporters of the currency swap, the deal will enable Nigerians who trade with China to pay for their goods in Chinese Yuan, bypassing the current transaction cost of having first to obtain the US dollars, which will subsequently be exchanged for the Yuan to pay for such goods. Supporters of the deal also believe that apart from easing the pressure on the demand for dollars, the deal could actually lead to increased investment flows from both China and the United States. The argument here is that if the deal shores up the value of the Naira against the dollar, it will actually encourage American investors to invest in our economy, because fewer dollars will yield more Naira for investments. Supporters of the deal also believe that with the Yuan not only being available in the commercial banks but also in the bureau de change (BDC) segment it will mean more business for the BDC operators as most other African countries  will come to Nigeria to source for Yuan.

Concerns

Just as the currency swap deal is being enthusiastically welcomed in some quarters, some have also expressed strong concerns about it.

One lingering concern is why the deal was consummated with the ICBC, rather than with the PBoC as is the standard practice with currency swap arrangements. Critics have also expressed concerns that an overvalued Naira and unrestricted access to the Yuan might encourage unfettered importations and dumping from China (already infamous for dumping inferior goods in the country), which will further stifle our local industries.  The “flooding” of Nigerian markets with cheap Chinese goods may particularly adversely affect the local textile industries, which are already struggling. The fear therefore is that the currency deal may reinforce Nigeria’s position as a dumping ground for goods from China and undermine the import-substitution efforts of the Federal Government. 

With the rivalry between the West and China in Africa, there are equally concerns that the deal may not be acceptable to the West as it may affect their own trade balance with Nigeria. How will the West respond? Will they offer more and improved terms of trade to Nigeria or will they choose to wield the big stick? Does Nigeria have the leverage to play the beautiful bride by playing China against the West for its benefit as several African countries did between the East and the West during the Cold War?

Critics are also sceptical about the touted expected greatest benefit from the deal – the strengthening of the naira against the dollar. To many critics, for the China deal to be able to have such an effect on the naira against the dollar, the country would need first to enhance its productive base. It is also argued that despite the deal a devaluation of the naira against the US dollar remains likely this year because the swap arrangement is not capable of addressing the disparity between the naira’s official exchange rate of N197-N199 to the dollar and the parallel market’s rate of $1 for about N320. 

Some critics equally believe that it is rather too hasty to accumulate a substantial portion of the country’s foreign reserves in the Chinese currency in view of its volatility and suspected manipulation coupled with the fact that it is not yet an international reserve currency. There are also concerns about the speculated exclusion clauses in the deal such as that requiring that it precludes Nigeria from dealing with ‘any other China’ (such as Taiwan). 

In the same vein critics worry that with Chinese exports accounting for about 80 per cent of the total bilateral trade volumes between the two countries, Nigeria may not reap much benefit from the deal given the large trade imbalance in favour of China while China will be the main beneficiary.

Overall, the issue with every deal is not so much about who benefits more but whether the country has got the best deal within the limits of its available options. Unfortunately since the details of President Buhari’s currency swap deal are not yet in the public domain and we are yet to see how this works in practice (not just on paper), it will be difficult to take a categorical position on it. The encouraging thing however is that since several of the countries that had entered into such a currency swap deal in the past renewed it at the expiration of the initial term (usually three years), we can surmise  that there must be something beneficial in it to warrant these countries doing an ‘Oliver Twist’.

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