Opinions are still divided among stakeholders in the economy about the Federal Government’s recent currency swap deal with China. While some people are of the belief that the swap holds bright prospects, others think it has grave implications for Nigeria. Recall that during his official trip to the Asian power house and the world’s second biggest economy, the Federal Government reportedly struck a Naira and Yuan swap deal. It was designed to ease trade transactions between both countries, devoid of extant exchange rate challenges with the US Dollar. Moreover, the deal is said to have the potential of shoring up the value of the nation’s currency, in the foreign exchange market, through associated bidding scheme, with a reduced demand for dollar and other major currencies, other than the Yuan.
It should be pointed out that this is not the first time that Nigeria is considering Yuan in her foreign exchange portfolios management. Recall that the inclusion of Chinese Yuan as part of Nigerian reserve currency was done about five years ago by the immediate past CBN Governor, Sanusi Lamido Sanusi, ostensibly to diversify the reserve and reduce the currency risk associated with the U.S. dollar. That action was taken at a time when the U.S. economy was said to be vulnerable after the global financial meltdown triggered by sub-prime mortgage mess.”
In practice, the currency swap deal consists of an agreement between two Central Banks, at least one of which must be an international currency issuer, to swap their currencies. In other words, the currency of the partner country must be internationalized. The Central Banks party to the swap transaction can lend the proceeds of the swap, against collaterals they deem adequate, to the commercial banks within their jurisdiction, to provide them with temporary liquidity in a foreign currency. The overriding objective for the currency swap is to address short-term foreign currency liquidity challenges which have reportedly led to Nigeria’s inability to meet foreign currency demands. With the currency swap, depending on the value, a significant portion of the country’s import bills from China would now be denominated and settled in the Chinese Yuan, thereby reducing the demand for Dollar by Nigeria.
Shedding light on the subject, Dr. Ganiyat A. Adesina-Uthman, the Head of Economics Unit of National Open University of Nigeria (NOUN), argued that, “Basically, currency swap may be very helpful to ameliorate credit crunch and illiquidity problems as each country involve in the currency swap transaction are permitted to borrow and pay in their local currency. For instance, if a Chinese company is bringing 200,000 Yuan worth of goods to Nigeria and a Nigerian company is also exporting goods worth the same amount in naira value, both companies may agree to deliver and pay in their currencies. That is, the Chinese company will pay the 200,000 Yuan to the company receiving the Nigerian export to China. In the same context, Nigeria will pay equivalent amount for the import of the Chinese company to the Nigerian Company.” Both countries also would have benefitted from the currency swap and avoided the risk that usually comes along with exchange rate fluctuation, low cost of borrowing and most importantly, their comparative advantage. Each company can produce more of its goods at a relatively lower opportunity cost.
Altogether, the essence of the currency swap transaction is that two countries can engage in international trade without the use of international market currency. Rather, goods and money exchange hands in transactions between the countries using their local currencies as a means of hedging. The recent Nigeria-China currency swap is most needed at this time of our economic history to reduce demand for already scarce dollar as international market currency.
Many people are convinced that Nigeria has seen the dire need for diversification of its economy from its present monolithic product nature.
The agreement will facilitate exchange since it will eliminate cumbersome third party currency like the US Dollar. It will also facilitate trading arrangements that will see increase in volume in trade as barriers that hitherto had served as hindrances are eliminated. According to Malo, the direct trading relationship will facilitate a better understanding between the nations which will lead to faster and cheaper transfer of technology to Nigeria. He believes that another benefit will be in the area of the reduction in the pressure on the demand for other currencies, especially the US Dollar.
On the whole, it has been proven that trade among nations is a faster route to development and should be encouraged. In this regard, the steps currently being taken by the Federal government which will see to a better trading relationship with China should be supported and similar arrangements entered into with other key trading partners if they fulfil the requirements like China.”
Undeniably, Nigeria is not the first country that China would enter into such an agreement with. China has multiple currency swap agreements of the Yuan with Argentina, Belarus, Brazil, Hong Kong, Iceland, Indonesia, Malaysia, Singapore, South Korea, United Kingdom and Uzbekistan. According to the People’s Bank of China (PBoC), those swap agreements were intended not only to stabilize the international financial market, but also to facilitate bilateral trade and investment.
Having considered the contributions above, I wish to point out that the major drawback to the currency swap policy is that an unrestricted access to Yuan, at an overvalued naira exchange rate will undoubtedly encourage importation and stifle local production of goods. I, therefore, suggest that the government should try and incorporate an industrialization policy, which would require some of the imports from China to be produced locally after a defined timeline, particularly if Nigeria has relative manufacturing advantage for such products. Examples that can readily come to mind include ceramics, textiles, and plastics, among others.
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