Discourse

Naira/Yuan Swap: It’s benefit to local businesses

 

By Mike Adeyemi

Before now, if you wanted to purchase goods from China as a Nigerian businessman, you needed to first convert the naira to its Dollar equivalent, prior to converting that Dollar equivalent to the Chinese Yuan.

It was a burdensome process which negatively gave rise to currency speculators and dubious middlemen. Nigeria imports lots of goods from China – from Smartphone to tooth picks. China is Nigeria’s second-biggest trading partner after the U.S; with trade volumes between the two nations totalling $9.2 billion in 2017.

Nigeria runs a trade deficit, importing $7.6 billion worth of goods including textiles and machinery from China and exporting just $1.6 billion, mainly oil and gas.

With this swap deal, businessmen in both Nigeria and China will no longer require Dollar liquidity while doing business involving both countries and that will ease the pressure on our foreign reserves and the Dollar.

Most of our people are traders who sell stuff from China. To buy before now, they have to go through the US. That is, to buy from the Chinese, they first convert to Dollar. This awful procedural gives rise to some very critical problems.

First, the cost of the product becomes higher due to the cost of buying Dollar first and later buying Yuan as traders would pass the burden of these charges on to the final consumer.

Second, the price of the dollar will skyrocket as many traders ought to change or converts to the domestic currency.

Third, due to the dollar trade restrictions, time and money is wasted purchasing the dollar.

Owing to these, the Central Bank of Nigeria in its fiscal management responsibility and the People’s Bank of China in April this year signed a currency change agreement under a bilateral trade accord.

The arrangement to expand foreign reserves was first mooted in 2004 by the Central Bank of Nigeria to increase the percentage of Yuan in Nigeria’s foreign reserves from two per cent to about seven per cent.

However, the initiatives seemed to have been subdued until about two years ago when the authority of the CBN and the Peoples Bank of China revived the initiative which is now a reality.

In the recent time, Yuan, the Chinese currency has assumed superior standing in the world trade with some countries seeing it as a global reserve currency. With the deal, Nigeria became the fourth country in Africa (after Ghana, South Africa and Zimbabwe) to sign on the Yuan for its trading and financial market transactions.

Since the treaty, opposing views have greeted the deal, and irrespective of the theoretical trade imbalance in favour of China, however the deal has opened a fertile ground for mutual international trade and businesses between the two countries.

What perhaps seems vague to many analysts in Nigeria is that while the CBN resuscitated the plan about two years ago, the apex bank did not give in until it was sealed to engage in painstaking intercession, taking into consideration Nigeria’s concern, particularly on the 41 items restricted from accessing Forex from the Nigeria foreign exchange window.

The contract could not have come at a better time than now with the country’s way out from recession, impressive Foreign Direct Investment (FDI) through the establishment of the importers and Exporters (I&E) window, resulting in steady reserves growth.

The treaty, which was conserved and valued at Renminbi (RMB) 16bn is to provide adequate local currency liquidity to Nigerian and Chinese businessmen.

Two, it is also meant to help out other local businesses by reducing the difficulties usually encountered in search of third currencies.   

Indeed, the deal will protect local business people from the harsh effects of third currency fluctuations. The importance of this is that since almost 70 per cent of the goods we import come from China and Asia, why must we use Dollar to transact with China?

Henceforth, instead of using Dollars at N350 to 1 Dollar to import those goods, we can now buy Yuan at 47 Naira to 1 Yuan and import those stuffs directly.

As an option of buying these goods in Dollar in China, we will now buy them in Yuan, which is 5 times cheaper than Dollar.

Another sterling benefit of the swap deal is that, it will discourage players’ hoarding currencies to make gains to off load them in order not to have heart attack over huge loss arising from the currency swap with China.

Dollars and pounds will flood everywhere with no buyers, as buyers will draw naira from their accounts in banks with presence in China. Many Nigeria banks will be seeking to have their representative office in China like First Bank that saw in the future and already have an office in China.

Inflation will go down drastically because of the price of commodities that will drop. This will have a direct effect on the value of naira and invariably thicken the purchasing value of naira. Soon, you will be buying that techno phone you bought at N80, 000 for N12, 000. 

The production costs of doing business will grossly decline thus a marginal profit to the company and this intermittently lead to economies of scale.

Doing business internationally can seem a bit discouraging when dealing with currencies other than Naira. However, by looking at it from a very basic level and keeping a few key issues in mind, making transactions makes the task a great deal easier.

When selling goods or services to an international market, you have to take cognizance of foreign exchange. Many large companies and SMEs that sell their products in sterling saw a significant increase in sales following the Brexit vote as many foreign currencies, such as the dollar, suddenly had stronger buying power.

In considering how to price your product in a foreign market, you basically want to look at three factors – the current FX rate, whether your competitors set prices in sterling or local currency, and the image you want to cultivate with your customers in that market. Taking the time to consider all of your options before setting your pricing strategy can eliminate surprises and help your business succeed.

The exchange rate has an effect on the trade surplus (or deficit), which in turn affects the exchange rate, and so on.

In general, however, a weaker domestic currency stimulates export and makes imports more expensive. Conversely, a strong domestic currency hampers exports and makes imports cheaper.

One of the biggest obstacles for Small and Medium Enterprise (SMEs) operating internationally, whether dealing with suppliers or customers, has long been currency exchange. The value of one country’s currency in relation to the currency of another country is one of the more complex and volatile markets in the world.

The complex nature of foreign exchange has long meant that SMEs were at the mercy of banks and monetary transfer organisations when it came to doing business internationally.

*Adeyemi writes via e-Mail:mikeadeyemi2001@gmail.com

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