Currency swap only good as temporary measure

The CBN recently signed a 3-year $2.4bn bilateral currency swap agreement with the People’s Bank of China, which it claimed would help the liquidity issues faced by Nigerian traders and Chinese manufacturers.

According to the apex bank, with the deal Chinese businessman will have sufficient naira to purchase raw materials from Nigeria and Nigerian importers, on the other hand, will not endure the challenge of third currency fluctuations when trying to make payments for Chinese exports.

What this means is that, like a typical currency swap, Nigerian/Chinese businessmen can now bypass the use of the U.S. dollar and facilitate the direct exchange of the Naira and the Renminbi in relation to trade between Nigeria and China.
We see and welcome the agreement between the two countries as a positive development, given the foreign currency liquidity squeeze Nigeria frequently experience and the strong trade and investment ties between the two countries.

The currency swap agreement is clearly a strategic move by the CBN to boost FX stability with China as the nation’s largest import partner over the last five years. Indeed, the agreement will protect Nigerian business people from the harsh effects of third currency fluctuations. Beyond enhancing currency market stability, this move would also further facilitate trade and investments between both countries.

As the agreement comes into effect, Nigerian manufacturers, cottage industry players and anyone who need imports from China will be able to secure RMB from Nigerian banks. It will be much easier for most Nigerian manufacturers.

For instance, small and medium enterprises (SMEs) and cottage industries in manufacturing and export businesses will be able to import raw materials, spare-parts and simple machinery with ease to undertake their businesses by taking advantage of available RMB liquidity from Nigerian banks, without being exposed to the difficulties of seeking other scarce foreign currencies.

However, on the flipside, we would like to place caution on over-reliance on temporary measures and emphasize the need for bold and export-driven reforms to boost Nigeria’s trade position and provide a more stable support for the Naira in the long term.

As at 2017, Nigeria’s imports from China stood at N1.8tn, representing 18.7% total imports, while exports to China stood at N220.6bn, a mere 1.6% of total exports according to the NBS. Though the value of the deal places a cap on the volume of transactions, without the existence of proper measures by the CBN, the deal could widen the already large trade deficit between both countries, while ultimately, accelerating China’s vision to internationalize its currency.

According to figures provided by the National Bureau of Statistics (NBS), merchandise trade between China and Nigeria reached a record high of N2 trillion in 2017 representing 8.7 per cent of total merchandise trade in the country.

This makes China Nigeria’s third largest trading partner after India and the United States accounting for 12.5 per cent and 10.8 per cent of merchandise trade respectively. However, the Balance of Trade is heavily tilted in favour of China as imports of N1.8 trillion from the Asian giant in 2017 was 8.1 times Nigeria’s export of N220.6 billion and accounts for 20.9 per cent of total imports in the last five years.

It is on the strength of the following analysis that financial analysts have expressed concern that the currency swap deal recently signed by the Central Bank of Nigeria (CBN) and the Peoples Bank of China in the month of April would stifle Nigerian economy.

It is feared that the agreement would lead to economic dependence on China, despite the fact that Nigeria is a sovereign nation. Inexorably, it is anticipated that the policy will lead to the influx of Chinese goods into our country considering the fact that we are contending with weak regulation.

For this paper, the currency deal may only be good on its surface value. In the long run, it is feared that the initiative would allow the Chinese to compete with our local businesses, thereby, impeding the growth of indigenous firms.

We are therefore of the view that the only benefits of the currency swaps deal for Nigeria could be in the short run. It would address third party sourcing of the Chinese currency by Nigerian importers. And could take the trade deals with the Chinese to a new height and reduce the pressures of our foreign exchange.

There is also a possibility that the naira will strengthen from the currency swap deal, as the demand for Dollar drops. The swap deal will not only improve the speed, but also the convenience of transactions between both nations.

Looking at both the advantages and downsides of the currency swap agreement, this paper re-emphasize the need for caution on over-reliance on temporary measures and the need for bold and export-driven reforms that will boost Nigeria’s trade position and provide a more stable support for the Naira in the long term.

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