The currency swap agreement between Nigeria and China, which was sealed recently and valued at Renminbi (RMB) 16bn according to the CBN spokesperson, Isaac Okorafor, is to provide adequate local currency liquidity to Nigerian and Chinese businessmen.
The deal is also to assist other local businesses by reducing the difficulties usually encountered in search of third currencies. The idea to diversify foreign reserves was first mooted in 2004 by the CBN to increase the percentage of Yuan in Nigeria's foreign reserves from two percent to about seven percent. However, the initiative seemed to have been subdued until about two years ago when the Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, and the Peoples Bank of China revived the initiative which is now a reality.
Since 2014, Yuan, the Chinese currency has assumed greater prominence in world trade with some countries seeing it as a global reserves currency. With the deal, Nigeria became the fourth country in Africa (after Ghana, South Africa and Zimbabwe) to sign on to Yuan for its trading and financial market transactions. Emefiele and his Chinese counterpart, Yi Gang signed the agreement in Beijing on Friday, April 27, 2018 with some officials of the two apex banks acting as witnesses.
Though divergent views have greeted the deal, and irrespective of the supposed 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 may be unknown to many is that since the CBN, under Emefiele, resuscitated the idea about two years ago, his team did not relent until it was sealed to engage in painstaking negotiation, taking into consideration Nigeria's interest, particularly on the 41 items restricted from accessing forex from the Nigerian foreign exchange window.
The deal could not have come at a better time than now with the country's exit from recession, impressive Foreign Direct Investment (FDI) through the establishment of the Importers and Exporters (I&E) window, resulting in steady reserves accretion. It must also be noted that, between 2016 and November 2017, the volume of bilateral trade between Nigeria and China grew by 30 percent, valued at about $12.3 billion. With the exit from recession and impressive foreign reserves accretion, Nigeria has become an attractive investment destination to every genuine investor and China is not excluded.
According to the CBN spokesperson, "with the operationalization of this agreement, it will be easier for most Nigerian manufacturers, especially, small and medium enterprises (SMEs) and cottage industries in manufacturing and export businesses, to import raw materials, spare parts and simple machinery to undertake their businesses by taking advantage of available RMB liquidity from Nigerian banks without being exposed to difficulties of seeking other scarce foreign currencies". The CBN position may have, however, allayed the fears of those who felt Nigeria may not actually benefit from the deal, if the nation's export volume does not increase. Some are of the view that, the sign-on may be the death knell of some budding or revived industries the CBN policy on 41 items and I&E window helped to give life.
The swap agreement will reduce the strain on Nigeria's foreign reserves denominated in dollars, as it is set to take an important place in global trade, and boost mutually beneficial business transactions between the two countries and Asian countries interested in trading or investing in Nigeria.
What people should understand about the Emefiele led-CBN is that, the CBN under his watch would not do what will hurt Nigerians or the economy. He promised on assumption of office that all policies of CBN under his purview will be people-oriented and he has not deviated from that pledge. He rebuffed foreign financial institutions' anti-people prescriptions for the economy, but opted for a home grown treatment and the gains are visible today. The Naira exchange rate has been stable and almost gaining its real value. The CBN came out with a policy suspending 41 items which can be produced in Nigeria from the inter-bank forex window, and hell was let loose. However, the positive effect of that policy is evident today. The Bank established the Anchor Borrowers Programme (ABP), rice is now produced in the country in large quantity and has saved Nigeria from huge drain on its reserves. Jobs and wealth have been created in the rice value chain. Some forex management policies were enunciated to arrest the enterprise of bettors and speculators, but the one that has proven to be the magic wand is the Investors and Exporters Window. This window was not given any hope of success, yet it became the magic wand among other policies that helped pull the economy out of recession.
While the CBN efforts should be commended in redirecting and ensuring that the economy stays on the path of sustainable growth, some people are doubtful of the gains. The agreement will assist the two countries in managing their reserves, especially Nigeria by reducing the exposure of foreign reserves to the volatility risk of a single currency, the dollar. Nigeria will gain from the technical know-how and ingenuity of the Chinese in the area of information technology, not to mention other benefits yet to be unveiled by the two countries.
Furthermore, the deal will help in smoothening the bilateral trade relationship between Nigeria and China, as China is believed to be Nigeria's largest trading ally. And more importantly is that, China's acceptance to swap its currency with Nigeria's Naira is an expression of confidence in the Nigerian economy, which is a good signal that Nigeria is back in business.
- Ajagbe, is a lecturer at Ekiti State Polytechnic.