Is currency swap Buhari’s magic wand for the economy?

In retrospect, President Muhammadu Buhari’s recent visit to China may have yielded some fruits. Besides signing a $6 billion deal to fund joint infrastructure projects, the Industrial and Commercial Bank of China Ltd (ICBC), the world’s biggest lender, and Nigeria’s Central Bank signed a deal on Yuan transactions.
For now, not much else has been heard over the deal, as the Nigerians government in yet to decide a takeoff date, and other details for its consummation. Like most things related to Nigerian government under the present administration, it is still on a snail speed pace.
Upbeat, Lin Songtian, Director General of the African Affairs Department of China’s foreign ministry, said of the currency swap: “It means that the renminbi (yuan) is free to flow among different banks in Nigeria, and the renminbi has been included in the foreign exchange reserves of Nigeria.”
Lin said a framework on currency swaps had been agreed with Nigeria, making it easier to settle trade deals in yuan.
The agreement was reached following a meeting between Buhari and Chinese President Xi Jinping.
The development followed hints by Finance Minister, Mrs. Kemi Adeosun, who some weeks back said Nigeria was looking at Chinese panda bonds – yuan-denominated bonds sold by overseas entities on the mainland – adding that they would be cheaper than Eurobonds.
While giving a basis for Nigeria’s interest in China in recent times, Prof. Jonathan Aremu, an economist said, business and trade relations between countries have grown astronomical in the last decade with bilateral trade volumes rising from $2.8 billion in 2005 to $14.9 billion in 2015.
“It is safe to conclude that the swap arrangement is being established in the context of the rapidly growing bilateral trade between China and Nigeria,” he stressed.
Echoing similar sentiments, Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, has expressed optimism that the agreement reached between Nigeria and China on a currency swap will strengthen the naira and help reduce the strong demand for the US dollar in the country.
Giving insight on the currency swap, Joseph Uwaleke, an Associate Professor of Finance, Head of Banking & Finance Department and Deputy Director of Research, Nasarawa State University Keffi, said since the financial crisis of 2008, central banks around the world have entered into bilateral currency swap agreements with one another.
Speaking specifically on the currency swap deal, Uwaleke said: “With China, as the experiences of other countries have proved, its a win-win. It is not for nothing that many developed and developing countries are queuing up to sign currency swap agreements with China – the second biggest economy in the world.
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“The fact that countries that utilised the three-year swap line offered by China opted for renewal is eloquent testimony of its palliative effect on ailing economies. It is, therefore, in the interest of Nigeria to join this growing club of countries seeking to “de-dollarise” and diversify risk in foreign exchange management.”
Commenting on the Naira-Yuan deal between Nigeria and China and what Nigerians stand to gain from such deal, the President of National Association of Nigerian Traders (NANT), Ken Ukuoha said the currency swap between Nigeria and China is a deal that has been long overdue.
Waxing philosophical, he said: “The more we chase and pursue the dollar, the more the dollar is running away from us, the more naira keeps getting weaker. At this rate, we find our economy collapsing and of course, this led to the taunted demand for naira devaluation. And in this regards, I must give kudos to the current administration for not yielding to the temptations and pressure to devalue naira, that would have been the worst thing that could have happened to this country.”
Lending his own voice, Managing Director of Iyke Commercial and Technical Venture Nig Limited, Ogun State, Iyke Onuigbo, a long time importer and dealer of Chinese products, believes that such deal is a good development for Nigerian economy if both governments can remain faithful on the said agreement.
“If I want to go to China to do business, I would not need to go and change my money to dollar any longer, except there is a need that arises and compels me to do so, but aside that I would have to do all my business transactions with Yuan. So what is the need of looking for dollar that is not even available? In the same vein, if a Chinese is coming for business transactions in Nigeria, what does he need dollar for, unless there is need to do so. So a Chinese can come to Nigeria and change his Yuan to naira and proceed on doing his transactions.”
In a monitored television magazine programme, Dr. Oladimeji Alo, a management consultant financial analyst said the Nigeria and China deal should be accessed on its merits.
“The only way the economy can be better off with the new alliance is for Nigeria to be a strong partner and not a weak partner in the scheme of things. As things are now Nigeria is more of an import dependent economy unlike China which is an export driven economy. The managers of our economy should roll up their sleeves and be ready to get their hands really dirty. It’s time to work. This is not time to be complacent at all. There is a lot of catching up to do now.”
There are arguments in some quarters that such a deal with China is not the best as Nigeria.
The chief executive of Financial Derivatives Company (FDC) Limited, Mr. Bismarck Rewane, while assessing the new policy regime cautioned that what the deal has done is to concentrate trade in the hands of one country.
“With the deal, Nigeria will be using the yuan to import from China, while they (China) will use the naira to buy crude oil from Nigeria. And then they (China) will take the oil to sell in the market to get dollars,” he said.
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The NANT boss, however, has a different view. According to him, with the latest reports on the trade volume between Nigeria and China in the years past, it is obvious that Nigerians should begin to reason that trade has left America and Europe and the hope of Nigeria is in the south-south cooperation or region.
On the issue of substandard products, it is generally believed that products made in China have short life span and irreparable when damaged.
As Sino-Africa ties continues to outperform, a number of African central banks are applying to the Chinese Central Bank for currency swaps, which is the exchange of a loan in one currency for another and the placing of a share of their reserves in the RMB. Among them is the Bank of Ghana, Mauritius, Zambia, Kenya, among others.
According to Swift RMB Tracker, the RMB is already being transferred over Swift by more than 1,000 banks in 85 countries. Swift, or Society for Worldwide Interbank Financial Telecommunication, is a global transfer system used by companies for financial transactions. Recent data by Swift shows that the growth in the use of the RMB in traditional trade finance has propelled the RMB to the second most used currency in the market.
As the controversy rages on over the propriety or otherwise of the currency swap, not a few Nigerians are waiting to see how this whole thing will play out.