Gains, Pitfalls Of  Naijas Currency Swap Deal With China

Gains, Pitfalls Of Naijas Currency Swap Deal With China



Separated stakeholders say policy may facilitate company, stifle local businesses

For diverse stakeholders in the economy, the Federal Governments recent currency swap deal with China holds both glowing prospects and grave implications for Nigeria even as the naira inched up against the dollar at the weekend at the parallel market.

During his official trip to the worlds second biggest economy, President Muhammadu Buhari reached a naira and yuan swap deal, scripted to ease trade transactions between both states, devoid of current exchange challenges with the United State dollar.

Furthermore, the deal, according to Presidency sources, has the potenrial of shoring up the value of the states money, in the foreign exchange market, through a concomitant emergent command scheme, with tactical decreased need for dollar and other major currencies, aside from the yuan.

The currency swap deal includes an agreement between two central banks, at least one of which must be an international money issuer, to swap their currencies. The central banks party to the swap transaction can give the proceeds of the swap, against collaterals they deem sufficient, to the commercial banks within their authority, to give them temporary liquidity in a foreign currency.

But pessimists pointed out the swap deal wasn't consummated between the two states apex banks but between Central Bank of Nigeria (CBN) and Chinas ICBC- the worlds biggest lender by total assets and market capitalisation. While this may not affect the goals of the swap deal at all, it raises some fundamental sovereign problems, according to an analyst who spoke on condition of anonymity.

The Managing Director/Chief Executive Officer of Cowrie Investment Limited, Johnson Chukwu clarified the currency swap scheme would address , on a short-term basis, the present liquidity challenge in the states foreign exchange market.

He said: I believe that Nigerias overriding goal for the currency swap would be to address short-term foreign currency liquidity challenges which has led to CBNs inability to meet foreign currency demands. With the currency swap, determined by the value, a significant part of Nigerias import bills from China would now be denominated and settled in yuan, thereby reducing the interest in dollar by Nigerias importers.

Yet, he pointed out the major draw back to the currency swap policy is an unrestricted access to yuan, at an overvalued naira exchange rate, if the N30/RMB is the established exchange rate, will surely encourage importation and stifle local production of goods.

I recommend the Government should try and incorporate a strategy much like that of the cement business policy, which would necessitate some of the imports from China to be made locally after a defined timeline, particularly if Nigeria has relative producing advantage for such products. Examples that can readily come to mind include fabrics, plastics, ceramics, among others.

He described the increase of inclusion of Chinese Yuan within Nigerian reserve currency was done about five years ago by the immediate past CBN governor, largely to diversify the reserve and reduce the currency risk connected with the U.S. dollar.

That action was taken at a period when the U.S. economy was particularly vulnerable due to the weakness of their market after the global financial crises triggered by sub-prime mortgage.

In his reaction, the National President, National Palm Produce Association of Nigeria (NPPAN), Henry Olatujoye, welcomed the currency swap deal, describing it as an incredible measure that would significantly reduce the raising pressure on the U.S. dollar, which has gone haywire in the foreign exchange market.

According to Olatujoye , the judgement has the capability of bringing double investment to the country from China on one hand and from the U.S. on the other.

The NPPAN president allayed any fear the determination can lead to the higher importation of Chinese goods into Naija, citing the economic rivalry or money war between China and America.

He, nevertheless, expressed the concern that European states may not be well disposed to it because it's effective at adversely affecting their trade balance with Nigeria, warning that their stakeholders could frustrate the move.

The Chairman, Mobile Applications Alternative, Chris Uwaje, considered that the naira to yuan swap arrangement should reduce the pressure on the naira if properly implemented.

According to him, the deal if it becomes a reality, means the de facto currency, dollar , will no longer hold on the import and export deals between Nigeria and China.

Uwaje continued: We dont have to use dollar to pay because its going to be costlier, we pay with yuan. By so doing we prevent every kind of round tripping.



Uwaje encouraged Buharis economical team to see the way the nation can truly leverage on the technology prowess of China for Nigeria to achieve a sustainable economy.

Go to this blog to find out more about online Naija news : The website has the newest news about Naija. Based on Gbade Buraimoh, a Lagos-based financial expert, the quest for dollar through banks will definitely reduce, as all transactions between Nigeria and China will be in yuan rather than dollar.

He found that petroleum sales from Nigeria to China would be settled in Chinese money, stressing that access to yuan would also be simpler.

The swap will remove challenges arising from transactions with the dollar and promote business flexibility between Nigerian and Chinese, Buraimoh described.

The Director-General of Lagos Chamber of Commerce and Industry, Muda Yusuf concurred that the swap deal would smoothen the payment system in the bilateral trade between both states but stressed that it might not necessarily reinforce the naira in the currency marketplace, as the state would need to accentuate its productive base to reach that.

An Abuja-based international affairs and diplomacy pro, Kadiri Abdulrahman, viewed the currency swap deal as a positive move towards enhancing the value of the naira, therefore improving access to cheaper foreign exchange, in favour of members of the business community.

The Director- General of the African Affairs Department of Chinas Foreign Ministry, Lin Songtian told reporters in Beijing after the agreement was signed by the Governors of Nigerias Central bank and the Industrial and Commercial Bank of China Ltd. (ICBC) that the Renminbi (yuan) is free to flow among different banks in Nigeria and has been included in the foreign exchange reserves of Nigeria.

Nigeria isn't the first nation that China would enter into such an arrangement with. The Asian powerhouse has multiple year currency swap agreements of the Renminbi with Argentina, Belarus, Brazil, Hong Kong, Iceland, Indonesia, Malaysia,Singapore, South Korea, United Kingdom and Uzbekistan.

According to the Peoples Bank of China (PBoC), those swap deals were intended not only to stabilise the international financial market, but also to ease bilateral trade and investment.

Meanwhile, the benefit of the currency swap deal and other understandings reached in Beijing during Buharis excursion to the Far East Asia nation has rubbed off on the air travel sector, as a Nigerian carrier, Air Peace announced that it would shortly commence scheduled flight to China from Enugu.

Chairman of Air Peace, Allen Onyema revealed at the Enugu Economic Summit the airline has been made Nigerias official flag carrier for the course.



According to him, with the likely ease on the pressure on the dollar, it'd bring down the value of the dollar with regards to the naira, which he said would now make it possible for American investors to invest in the Nigerian economy again.

In his perspective, the current high rate of the dollar in Nigeria had in recent months deterred American and Western investors in the Nigerian economy.

The government and the flying people created a yearning opening, all the arrangements in this state are tilted to one side, the foreign airlines, but this government of Muhammadu Buhari has began to do things otherwise recognising the local airlines and seeing that in Air Peace there will be a lot of quality, so that they determined to give us when we implemented it didnt take time before they gave it to us, said Onyema.