Can Nigeria-China Currency Swap hinder Industrialisation?

Godwin Emefiele, governor, CBN
Godwin Emefiele, governor, CBN

Financial experts in Nigeria are divided on the actual benefits of the recent currency swap the country had with China

By Anayo Ezugwu

Despite the assurances by the Central Bank of Nigeria, CBN, that the Nigeria-China currency swap would address shortage of dollars for import purposes, financial experts are divided as to its benefits to the country. Some of those who spoke to Realnews are worried that the arrangement might not be in the interest of the country’s economy.

They argued that such a deal could hinder the ongoing diversification of Nigeria economy. They said this could lead to the near destruction of Nigeria’s industries. But others believe the currency swap will strengthen the country to become the trading hub with China in West Africa.

Austin Nweze, lecturer, Pan-Atlantic University and economic analyst, said Nigeria is not gaining anything from the deal because the Chinese are not buying any finish product from the country. He noted that they only buy raw materials and there is not much money in raw materials.

“We need to improve the service chain so that we can export finish products to them and that is the only way we can benefit. They are exporting finish goods to us therefore we need to export finished goods to them but we are not doing that.

“All they are interested in is the raw materials and you know that Chinese imperialism is worse than western imperialism. The western nations will tell you to bring the raw materials and they will turn it into finish products and ship it back to you. But for Chinese, they control the source of the raw material, which is more dangerous,” he said.

According to Nweze, the deal will give China a greater foothold into the Nigerian economy because it would enable them to export all manner of things to the country at cheaper rate. He explained that the arrangement fixed the exchange rate for Naira and Yuan at N305 and with this the Nigerian business owners cannot compete with them.

“China has a stronger economy and stronger currency compared to Nigeria. They will not create jobs because they bring their labour everywhere to go to. It will not positively affect our currency and it will not do anything on inflation. The idea is just to handover Nigeria’s economy to Chinese.”

On his part, Henry Boyo, an economist and industrialist, said the currency swap means a major Chinese footprint on Nigeria’s economy. He said this deal would bolster Nigeria’s Renminbi reserves (Renminbi is the official currency of China), but this may lead to a corresponding drop in dollar reserves.

He noted that China may readily depreciate its Yuan to promote export price competitiveness of its products in the United States and other dollar denominated markets. According to him, if this happens, Nigeria’s increasing Renminbi reserves would also become devalued and would buy less and less dollars than before.

Boyo said this arrangement would increase the value of Chinese exports to Nigeria well beyond the present $15 billion. He regretted that the arrangement would challenge Nigeria’s desire to diversify its economy by adding value to its local agricultural and raw materials output.

“The downside is that the Chinese buying houses with surplus naira liquidity in Nigeria will outbid local industries to monopolise supply sources of our agricultural and raw materials and subsequently cart this away to China as exports for processing into a multitude of finished products which will be ultimately re-exported to Nigeria at much higher cost.

“In contrast, this would be counterproductive to our abiding desire to become a robust industrial economy by adding value to our agricultural and raw material products before export. The other question also is whether or not the 41 items presently banned by the CBN from importation will now qualify for Yuan allocations for Chinese sourced substitutes, or indeed, if Chinese financial houses domiciled in Nigeria can dip into their heavy naira surpluses to also lend to Nigerian businesses in naira?”

Unlike Nweze and Boyo, Uche Uwaleke, head of department, Banking and Finance, Nasarawa State University, Keffi, said the deal is welcome development for Nigeria’s foreign exchange market. He argued that the currency swap would deepen the confidence of foreign investors in the Nigerian economy.

According to him, the deal would reduce pressure in the demand for dollars in the market and provide currency options for imports. Uwaleke said the deal would diversify Nigeria’s foreign reserves and make it the clearing house in Africa for Yuan transactions.

The CBN had on Thursday, May 3, signed a $2.5 billion bilateral currency swap with the People’s Bank of China, PBoC, making Nigeria, the third African country after South Africa and Egypt to sign such a deal with China.

The agreement will allow the two sides to swap a total of RMB15 billion for NGN720 billion, or vice versa, in the next three years. The deal can be extended by mutual consent. The currency-swap was calculated at the CBN’s interbank rate of NGN305:USD1, rather than the Nigerian Foreign Exchange Fixings, NIFEX, rate of NGN338.7:USD1.

This implies that it is unlikely to see any unification between Nigerian exchange rates anytime soon. The deal aims to facilitate bilateral trade and investment but also to promote financial stability and broader economic cooperation between the two countries. It will also help the country to position itself as a trading hub with China in the West African sub-region.

This agreement will provide NGN liquidity to Chinese firms looking to do business with Nigeria and provide RMB liquidity to Nigerian firms looking to do business with China, helping achieving effectiveness and efficiency in trade transactions between the two countries, without being exposed to the challenge of seeking another foreign currency.

– May 11, 2018 @ 16:25 GMT |

 

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