Nigeria-China currency swap: Not yet Uhuru!
Expectedly, President Buhari’s visit to China elicited a lot of reactions and comments. However, the most significant issue dominating the trip is the currency swap agreement between China and Nigeria. After the euphoria of the visit, it is time to enquire to know the exact benefits of the swap deal for the country.
To begin with, a currency swap is an arrangement between two friendly countries (in this case), which have regular, substantial or increasing trade, to basically involve in trading in their own local currencies, where both pay for import and export trade, at the pre-determined rates of exchange, without bringing in third country currency like the US dollar.
Nigeria’s Central Bank and the Industrial and Commercial Bank of China (ICBC) – the world’s biggest lender- last week, signed a currency swap. Although the swap will facilitate direct trade with China by reducing transaction costs, even as it provides a negotiating platform for Nigeria to extract better trade and investment concessions from the former; its impact on the currency pressure is neutral, because it doesn’t increase the inflow of forex into government coffers.
The structural problems in the foreign exchange market occasioned by outstanding backlog of unpaid Letters of Credit (LCs) and heavy trade imbalance between Nigeria and China will neutralise any effect the swap may have on easing the demand for dollars and strengthening the naira. 80 percent of the $14.9 billion trade volume between Nigeria and China consists of imports from China, implying that Nigeria spends almost $12 billion a year importing Chinese goods. In other words, exports to China currently sit at 20 percent, mirroring the enormous trade imbalance between both countries. Rather than ease the pressure on dollars and strengthen the naira, our yuan earnings will be significantly constrained and the pressure on the greenback will simply be transferred to the yuan.
Increased dependence on Chinese imports is another burlesque that stares Nigeria in the face, amid efforts to curtail its import dependence. The benefits of the currency swap will not necessarily rescue the sinking Nigerian economy, which continues to grapple with plummeting crude price, soaring inflation and forex capacity issues.
The solution to these challenges has been over flogged: Nigeria must diversify its exports away from oil to other commodities, most of which should be value-adding. Nigeria recorded a 58 percent decline in non-oil exports to $4.39 billion in 2015, from $10.53 billion in 2014. Our top five non-oil exports as at the fourth quarter of 2015 were cocoa, sesame seeds, cigarettes containing tobacco, unwrought aluminium alloys and technically specified natural robber, in primary form or in plates, according to data from the National Bureau of Statistics.
India, Spain, the Netherlands, France, and Brazil were the major destinations of these exports. The currency swap is poised to alter this, as destination of exports and origination of imports will change. This change will be triggered by the ease in trade transactions between Nigeria and China, which eliminates the exchange rate risks involved in converting naira to dollars, and then to renminbi. Although some are ecstatic about the swap agreement between Nigeria and China, we are not euphoric about it because it fails to address our major challenges of trade deficit, acute forex shortage and exchange rate disparity.