Recently Nigeria and China signed a bilateral agreement to operate a three-year currency-swap deal. The development is aimed at facilitating enhanced trade between both countries, given the fact that China is Nigeria's biggest trading partner.
The event which took place on Friday, April 27, 2018 in Beijing China saw Governor of the Central Bank of Nigeria (CBN) Mr. Godwin Emefiele standing for Nigeria while Dr Yi Gang of the Peoples Bank of China (PBoC) represented his country.
The pact was the result of over two years of negotiations between both banks. The transaction is also intended at providing adequate local currency liquidity for Nigerian and Chinese industrialists and other businesses to reduce their difficulties in the search for a third 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.
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.
A currency swap is a process whereby two countries elect to denominate aspects of their mutual trade on a direct exchange between their respective national currencies, instead of a third-party value standard that is extraneous to them, which in the present global system is the US dollar. Under the currency swap arrangement, trade between Nigeria and China will be denominated in a direct exchange between the Naira and China's currency the Rheminbi.
Though divergent views have greeted the deal, and irrespective of the supposed trade imbalance in favour of China, mixed reactions have flowed freely with commendation of the initiative dominating. Bringing us to the major questions on every analyst and even an average Nigerians' mind is whether the currency swap is a good idea for the nation's economy right now? Does it bring any significant benefits? What are the aftermaths of the swap? Would Nigeria turn to dumping ground for Chinese goods?
Some key benefits of the deal include;
Experts and analysts both home and abroad have chorused that the development will lead to the reduction in 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.
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 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 and most crucial is China's acceptance to swap its currency with Nigeria's Naira, an expression of confidence in the Nigerian economy, which is a good signal that Nigeria is back in business.
However, some major notes of caution should be taken to avoid what will be called a 'a major mistake in growing the nation's economy';
The CBN must ensure that constant oversight and regulation is at its peak so that the rise in demand for the Yuan will not result in a possible depreciation of the Naira against the Chinese currency and further widen the gaps in trade balance and balance of payments in favour of China.
The National Agency for Food, Drugs Administration and Control (NAFDAC), and the Consumer Protection Council (CPC), to be alert and be vigilant to ensure that the currency swap deal and its possible attendant surge in imports does not turn the country into a dumping ground for inferior/substandard Chinese products.
The existing trade deal between Nigeria and China must be revisited and retooled at this moment to strengthen control and sanction mechanism against irregular and sub-standard exports from China targeting the Nigerian market. The recent statement coming from the CBN Governor, Godwin Emefiele that the 41 banned items are not included in the deal is a welcome development.
The surge in Chinese imports if unchecked, especially given the history of appetite of Nigerians for imported goods, would negate the federal government's import substitution agenda, stifle domestic production and place local industries in a pitiable and vulnerable condition with attendant effects that would defeat government's efforts at job creation.
Against this backdrop, the government's agencies and indeed the Nigeria Customs Service, should rise up to its billing in order to guard the nation against unbridled influx of goods.
However, the success of any currency swap depends on the eventual take home for the participants in the deal especially when the issue of parity is considered. This is where the Nigeria China currency swap as it stands today throws up some unique challenges that need to be resolved by the former before the celebration begins. For without such considerations, the country may end up with the shorter end of a deal that would have deepened her political and economic crisis.