Nigeria and China recently signed a currency swap agreement worth $2.5 billion to boost their bilateral trade. 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 was a culmination of two years of painstaking negotiations by the central 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. 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 unflappable sincerity of purpose to make the deal achieve its goals for the mutual benefit of all.
Details of the agreement show the deal will allow both countries to swap a total of China’s Renminbi (RMB)16bn for $2.5bn in the next three years. The agreement is subject to extension 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 immediate implication of this is that those that call for a unified foreign exchange window, as the International Monetary Fund (IMF), will have to wait much longer than anticipated. Nonetheless, we expect the deal to 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. We appreciate the fact that one of the goals of the swap agreement is that it will provide adequate local currency liquidity for Nigerians and Chinese manufacturers and reduce the current difficulties they encounter in search of the US dollar, with obvious fluctuations. This will be a big relief for our Small and Medium Enterprises (SMEs).
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.
We urge the CBN to continue with its policy in the Secondary Market Intervention Sales (SMIS). It is also necessary for the CBN to be careful about the currency conversion rate. This is because, judging by the present balance of trade between both countries which financial analysts say, favour China more, Nigeria may have much to settle at the end of the deal. Currently, China exports account for 80 per cent of the total bilateral trade volume. However, this can be redressed within the framework of the agreement. Above all, the currency swap is a good deal that should be fully implemented.