In May this year, the Governor of the Central Bank of Nigeria, Godwin Emefiele, enthusiastically confirmed the establishment of a currency deal between the Bank of China and its Nigeria counterpart.
Emefiele, also reported that details and operational guidelines relating to the ¥15bn/N720bn swap would be announced later.
The CBN’s expectation, however, is that the swap agreement “will ‘see’ both banks make liquidity available in their respective currencies to facilitate and promote trade and investment between the two countries through the purchase, sale and subsequent repurchase and resale of the Chinese yuan against the naira and vice versa”.
Nevertheless, despite the CBN’s palpable optimism on trade facilitation between China and Nigeria, and the expressed hope that the swap deal would ease pressure of dollar demand to induce stability or even a stronger naira exchange rate, some Nigerians still remain very doubtful that the swap will actually neither support or propel the economy towards the much desired diversification nor facilitate rapid industrialisation with increasing employment and local value added.
Hereafter, the promise and expectations from the currency deal, details of which were published on June 8 2018, will be examined in an interrogative prose to facilitate a multifaceted appraisal. Please read on.
Can you explain in layman’s language, what the naira/yuan swap deal means?
It simply means that the People’s Bank of China will place a deposit of ¥15bn (i.e. US$2bn or N720bn) with the CBN. The CBN would, thereafter, conduct weekly auctions to sell the Yuan to licensed banks, who will in turn sell their yuan purchases for naira to ONLY customers who wish to import goods from China.
So how will this arrangement help to improve the naira exchange rate?
The CBN’s expectation is that the ¥15bn liquidity made available to Nigerian importers, will have similar impact as pumping an additional US$2bn forex liquidity into what seems to be a perpetually challenged dollar market. The problem however, is that, even if better or preferred qualities of the imported products exist elsewhere outside China, the Yuan will not be permitted for such imports.
Does the yuan/naira deal accommodate delayed payment terms for importers of Chinese products?
Delayed payment term, or trade credit, is a significant measure of trust between trading partners and it is usually an interest free loan, which may range in tenor, from within weeks to several months. The advantage of such credit is that credible Nigerian importers do not have to borrow and pay up to 20 per cent interest on the bank advances which they may require to fund imports. Presently, the yuan/naira deal is, strictly cash and carry for Chinese imports ONLY. Thus, to access the yuan liquidity, Nigerian importers must have their own naira or they would first borrow naira from banks at the prevailing interest rate, before any bank will, in turn, sell the yuan it buys from the CBN’s auctions.
The impact of the ¥15bn on trade expansion may be relatively restrained if Nigerian importers of Chinese goods, who already enjoy existing trade credit, can also access the domestic Yuan market and begin to settle, erstwhile dollar denominated invoices of their Chinese suppliers, with naira payments. However, such a restraining trade impact will be completely erased if the ¥15bn placement with CBN automatically revolves, upon liquidation of the initial tranche, rather remain static on an annual limit of ¥15bn. Conversely, tenured ¥15bn placement, with say, 3 cycles annually, may actually ultimately transfer over N2 Trillion into the Bank of China every year.
So what will China do with all that naira?
Well, according to CBN, “the Chinese business man will have sufficient Naira to purchase RAW MATERIALS from Nigeria, while Nigerian importers will not endure the challenge of third currency fluctuations, when trying to make payments for Chinese Exports.”
The CBN’s observation is clearly misleading, as the naira/yuan rate is actually not static but also intrinsically tied to the prevailing yuan/dollar rate.
Notably, some critics wonder that if China monopolises the market for Nigerian raw materials with their huge caché of naira, from where will Nigerian manufacturers and converters get reasonably priced raw materials, in adequate supply to fast track industrialisation and employment with a diversified economy, as expected?
Already, local industries have expressed concern at the way ubiquitous Chinese businessmen outbid them in the market for local raw materials. For example, the growth of the domestic scrap metal industry is reportedly presently stymied by the active presence of Chinese businessmen who have cornered the scrap market at the farmgate!
So are you saying that that the accumulation of naira in the hands of Chinese businessmen could also hurt our industries and our hope for economic diversification?
Yes, this is a real possibility, if it’s not properly recognised and managed to reflect Nigeria’s true interest. Besides, the naira rate, may actually face the risk of further devaluation and Nigeria’s economy may ultimately buckle at the knees, if the Chinese decide to ‘mock about’ with their huge caché of naira.
Furthermore, in the spirit of liberalism towards China, Chinese banks may also be formally established in Nigeria; in such event, Nigeria’s economy may become denominated by the Chinese and consequently, Chinese-Nigerian Banks could consolidate their hold on our economy by legitimately and directly borrowing more Naira from Nigeria’s Central Bank and lending to primarily Chinese businessmen to expand their activities, in more areas of business, including the stock market, government’s bills and bonds and indeed in any lucrative local investment throughout Nigeria.
With the accumulations of so much naira reserves, can China ultimately demand to pay naira for crude oil imports from Nigeria?
Technically, there is nothing that should stop such a payment process. After all, it would be indefensible for any country to reject its own currency, particularly if it is legitimately acquired. Invariably, the temptation would be very high for China to ultimately also demand to pay for its crude oil imports from Nigeria with naira. If and when this happen, Nigeria’s dollar reserves will, obviously, become more challenged and Nigeria’s economy may be forced to become further dependant on China.
So will the Yuan deal reduce inflation or strengthen the naira rate?
No. It was never the CBN’s expectation that the naira/yuan deal would restrain inflation nor induce a stronger rate. Clearly, the naira rate is not distinctly a function of inadequate dollar reserves or yuan reserves, but actually a function of surplus supply of naira and regular auctions of dollars rations by the CBN in a market flush with naira. Unfortunately, the yuan/naira deal may further increase the challenge of systemic naira excess.
So China is actually significantly favoured by the naira/yuan deal?
Yes, indeed, Nigeria’s interest was not the driving factor in the naira/yuan deal. We recall that in a ThisDay Newspaper report on 18th April 2016, the CBN Governor Godwin Emefiele noted that “the agreement on currency swap with China will definitely benefit Nigeria because the essence of the mandate is that Nigeria is designated as the trading hub with China in the ECOWAS sub-region”.
Conversely, Lin Songtian, a senior official of the Chinese Foreign Ministry also noted that the deal on yuan transactions “means that the Renminbi is free to flow among different banks in Nigeria, and the Renminbi has been included in the foreign exchange reserves of Nigeria”.
Consequently, in order to facilitate rapid Yuan acceptance in our sub-region, Nigeria as hub will invariably host a Clearing House with affiliation to the People’s Bank of China to allow the Renminbi to become a common settlement currency which can be used for bilateral loans or aid.
Ultimately, a new bank with affiliation to the China bank will be established and dedicated to intermediate Yuan transactions in the sub region, as a product of the Currency Swap”. (See President’s trade mission to China – Published July 2016 at www.lesleba.com <http://www.lesleba.com)
The question therefore is whatever happened to the dream of the naira as an ECOWAS currency?
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