Last week, the Nigerian and Chinese authorities formally announced a currency swap deal involving the two countries’ currencies. This has taken two years in coming, but it is better than never. The currency swap agreement worth $2.5 billion is to boost bilateral trade between the second largest economy in the world and the largest economy in Africa. While the Governor of the Central Bank of Nigeria, CBN, Mr. Godwin Emefiele, led the Nigerian officials, the governor of the People’s Bank of China, PBoC, Dr. Yi Gang, led the Chinese officials at the official signing of the deal in Beijing, China. The deal which had been in the pipeline for more than 24 months is a culmination of two years of painstaking negotiations by the apex banks of both countries.
By this agreement, Nigeria has become the third African country, after South Africa and Egypt, to seal such agreement with China. Currency swap has become one major strategy of emerging market economies to ease bilateral trade relations between two countries. This sort of swap deal also has a cooling effect on the dollar denominated foreign exchange market. Since 2008, China had signed such swap deals with about 30 countries, the biggest being the 2014 swap deal with Hong Kong worth Y400bn. The deal with Nigeria has many economic benefits.
We heartily support it, and urge both countries to demonstrate unflustered sincerity of purpose to make the deal worth the trouble for the mutual benefit of all parties.
China’s Renminbi, RMB 16bn will be swapped for $2.5bn in the next three years with a clause to extend the deal by mutual consent. The swap deal is calculated at CBN’s interbank rate of N305/USD1 and not on the Nigerian foreign exchange, NIFEX rate of N338.7/USD1. The deal will have significant impact on our economy, contrary to the pessimism of some analysts that it will harm our indigenous firms and lead to the influx of Chinese goods into our country because of our weak regulations. Our country just like most other countries of the world is filled with Chinese goods, especially tools and devices. What will happen is that we will no longer require a third party foreign currency to trade with China. Goods will become cheaper as a result of cheaper forex. Even technology transfer will be easier to achieve.
In addition to facilitating bilateral trade and investment inflow, the currency swap is expected to promote financial stability and a broader economic cooperation. Currently, China is Nigeria’s largest trading partner. This deal is likely to open more business opportunities for traders and manufacturers of both countries. In the long run, it will improve CBN’s management of our foreign reserves, said to be growing steadily and currently looking good at $47bn (as at April 2018), from $30.9bn a year ago. Obviously, the currency swap will put Nigeria in a good position as a trading hub with China in the West African sub-region. With all hands on deck, this will help to achieve efficient trade transactions.
It is a welcome development that the deal is coming at a time when the CBN has made remarkable progress in diversifying its foreign exchange reserves away from the dollar by switching to the Chinese Yuan, which represents a tenth of its total reserves. Perhaps, the benefit of this deal is that it will witness a significant reduction of the current high demand for the US dollar and strengthen our currency. The deal could not have come at a better time because the Chinese currency had since September 2016 become one of the world’s reserve currencies.
This paves way for a broader use of her currency in global trade and finance. Altogether, with improved trading activity and strong foreign exchange reserves, it is good news that the naira has remained relatively stable in recent times, exchanging at N362/$1. Therefore, if Nigeria and China keep faith with the agreement, expectations are high that our currency will further firm up its value relative to other foreign currencies and the foreign exchange liquidity will also improve.
From all indications, the economy is doing much better. Inflation is steadily heading southwards, GDP is growing, jobs are being created, agric is booming. This swap can only help managers of the economy to do better. A lot of our agricultural crops like cassava are bought by China. Nigeria can only position herself properly to balance our trade volume with that country. Right now it is skewed against us. This swap should help.
