In this piece, we will look at the pros and cons of
the deal and allow the reader to decide for himself or herself.
Basically a currency deal is an agreement between two
central banks, at least one of which must be an international
currency issuer, to
trade in their own local currencies and pay for
import and export trade at pre-determined rates of exchange without
the use of a third currency such as the United States dollar or the
British pounds. Usually the aim of a currency swap deal is
to provide the parties with temporary
liquidity in foreign currency. One peculiarity of Buhari’s deal with
China however is that it was not cemented between the Central Bank
of Nigeria and its Chinese equivalent, the Peoples Bank of China (PBoC),
but with the Industrial and
Commercial Bank of (ICBC),
the world’s largest lender by total assets and market capitalisation.
It is not clear why the deal is not between the CBN and PBoC just
as information on the nature, size, duration, effective commencement
date, the cost of the deal and the interest rate are not yet in the
public domain.
It is important to underline that Nigeria is not the only country to
have signed such a currency swap deal with China. In fact since
2008, China has signed such a deal with nearly 30 countries, with
the biggest of such deals being the 400 billion Yuan currency swap
with Hong Kong in November 2014. In April 2015, the South African
Reserve Bank announced it had signed a three-year bilateral swap
agreement with the People’s Bank of China for the exchange of local
currencies of up to R57 billion. In fact since
2014 when the Yuan was recognised as a likely global reserve
currency, Ghana, South Africa and Zimbabwe have integrated the
currency into their financial markets.
In many ways Buhari’s recent currency swap deal is a
continuation of the moves initiated by Sanusi Lamido Sanusi, the
current Emir of Kano, when he was the Governor of the CBN. It should
be recalled that in 2011 Sanusi had indicated that
a small percentage of the country’s foreign reserves
would be held in the Chinese Yuan. At the time, the country’s $32
billion in reserves were held 79 percent in dollars and the rest in
Euros and Swiss francs. As late as 2014, then CBN’s Deputy Governor
Kingsley Moghalu was reported as saying that the CBN was looking to
increase the percentage of Yuan foreign reserves in its possession
from 2 percent to 7 percent. Moghalu was further quoted as saying:
“It was clear to us that the future of international economics and
trade will shift in large part to business with and by China.
Ultimately the renminbi (Yuan)
is likely to become a global convertible currency.”
Potential benefits
For supporters of the currency swap, the deal will
enable
Nigerians who trade with China to pay for their goods
in Chinese Yuan, bypassing the current transaction cost of having
first to obtain the US dollars, which will subsequently be exchanged
for the Yuan to pay for such goods. Supporters of the deal also
believe that apart from easing the pressure on the demand for
dollars, the deal could actually lead to increased investment flows
from both China and the United States. The argument here is that if
the deal shores up the value of the Naira against the dollar, it
will actually encourage American investors to invest in our economy,
because fewer dollars will yield more Naira for investments.
Supporters of the deal also believe that with the Yuan
not only being available
in the commercial banks but also in the bureau de change (BDC)
segment it will mean more business for the BDC operators as most
other African countries will come to Nigeria to source for Yuan.
Concerns
Just as the currency swap deal is being
enthusiastically welcomed in some quarters, some have also expressed
strong concerns about it.
One lingering concern is why the deal was consummated
with the ICBC, rather than with the PBoC as is the standard practice
with currency swap arrangements. Critics
have also expressed concerns that an overvalued Naira and
unrestricted access to the Yuan might encourage unfettered
importations and dumping from China (already infamous for dumping
inferior goods in the country), which will further stifle our local
industries.
The “flooding” of Nigerian markets with cheap Chinese
goods may particularly adversely affect the local textile
industries, which are already struggling. The fear therefore is that
the currency deal may reinforce Nigeria’s position as a dumping
ground for goods from China and undermine the import-substitution
efforts of the Federal Government.
With the rivalry between the West and China in
Africa, there are equally concerns that the deal may not be
acceptable to the West as it may affect their own trade balance with
Nigeria. How will the West respond? Will they offer more and
improved terms of trade to Nigeria or will they choose to wield the
big stick? Does Nigeria have the leverage to play the beautiful
bride by playing China against the West for its benefit as several
African countries did between the East and the West during the Cold
War?
Critics are also sceptical about the touted expected
greatest benefit from the deal – the strengthening of the naira
against the dollar. For many critics, for the China deal to be able
to have such an effect on the naira against the dollar, the country
would need first to enhance its productive base. It is also argued
that despite the deal a devaluation of the naira against the US
dollar remains likely this year because the swap arrangement is not
capable of addressing the disparity between the naira’s official
exchange rate of N197-N199 to the dollar and the parallel market’s
rate of $1 for about N320. Some critics equally believe that it is
rather too hasty to
accumulate a substantial portion of the country’s
foreign reserves in the Chinese currency in view of its volatility
and suspected manipulation coupled with the fact that it is not yet
an international reserve currency. There are also concerns about
the speculated exclusion clauses in the deal such as
that requiring that it precludes Nigeria from dealing with ‘any
other China’ (such as Taiwan). In the same vein critics worry that with
Chinese exports accounting for about 80 per cent of the total
bilateral trade volumes between the two countries, Nigeria may not
reap much benefit from the deal given the large trade imbalance in
favour of China while China will be the main beneficiary.
Overall, the issue with every deal is not so much
about who benefits more but whether the country has got the best
deal within the limits of its available options. Unfortunately since
the details of President Buhari’s currency swap deal are not yet in
the public domain and we are yet to see how this works in practice
(not just on paper), it will be difficult to take a categorical
position on it. The encouraging thing however is that since several
of the countries that had entered into such a currency swap deal in
the past renewed it at the expiration of the initial term (usually
three years), we can surmise that there must be something
beneficial in it to warrant these countries doing an ‘Oliver Twist’.
Twitter: @JideoforAdibe
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