Nigerians await dividends of Yuan deal

Naira and Yuan

The new alliance between Nigeria and China has elicited mixed feelings from a cross-section of Nigerians who are not completely sold on the idea that the currency swap is the elixir that would literally heal the wounds plaguing the economy. In this report Ibrahim Apekhade Yusuf and Daniel Adeleye examine the prospects and challenges of the deal

The President Muhammadu Buhari visit to China recently yielded a lot of 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.

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.

Insight on Nigeria’s interest in China

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 astronomically 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.

These agreements allow a central bank in one country to exchange currency, usually its domestic currency, for a certain amount of foreign currency. The recipient central bank can then lend this foreign currency to its domestic banks.

China, for instance, has signed swap deals with nearly 30 countries since 2008 with the biggest being the 400 billion yuan currency swap with Hong Kong in November 2014.

Speaking specifically on the currency swap deal, Uwaleke said: “With China, as the experiences of other countries have proved, is 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.

“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.”

Proponents of currency swap

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.

The concept of economy diversification, he said, is not only on industries or building agriculture to push economy in different aspects alone, but diversification should also reflect in currency.

“In the time that monetary has to do with sales code of the nation that will control but fail the economy of such nation. In this regards, one would recall that Nigeria has been under dollars, and her economy has been somehow dollarised.”

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, the Managing Director of Iyke Commercial and Technical Venture Nig Limited, Sango-Ota, Ogun State, Iyke Onuigbo, a long time importer and dealer of Chinese products, believed that such deal is a good development for Nigerian economy if both governments of Nigerian and Chinese 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 compel 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.

While acknowledging that the new alliance is indeed advantageous, he however cautioned that those saddled with the management of the economy should ensure that nothing is left to chance as far getting the country back on track, especially in the area of infrastructural development.

“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.”

Fears over currency swap

There are arguments in some quarters that such deal with China is not the best as 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 China will take the oil to sell in the market to get dollars.

To many of these analysts, Nigeria’s dollar income will reduce and its imports from the rest of the world would also reduce. And this may pose danger of making Nigeria more dependent on China.

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 your 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.

“So Nigeria’s dollar income will reduce and its imports from the rest of the world would also reduce. So Nigeria will be more dependent on China. That is all,” Rewane said.

“It doesn’t change anything. The man who is going to import from the US, or the man who is going to import a car from Germany, will he need yuan to buy it. We are only playing with mirrors. It does not increase the actual flow of dollars to Nigeria. It only means that our trade is more concentrated in Chinese goods and the Chinese with the naira they get from Nigeria when they buy oil,” the FDC boss added.

The NANT boss, however, has a different view. According to him, 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.

“In the same 2014, trade between Nigeria and China was $11.76billion and in 2015, it grew to $14.94billion. So with the above figures, it shows that China is buying more from Nigeria.”

“If we also look at the issue of regional trade, that is, consumer, wholesales and distributing trades, the global importation to Nigeria today shows 87.3% of our total imports in regards of distributing trades are coming from Asia tigers. And this 87.3% coming from Asia tigers, 72.1% is coming from China alone.”

“But with the naira-Yuan deal, you can carry your naira and go to China because Chinese government too will use it to buy our crude oil. And the economy will better for it because it would also encourage a free flow commit of exchange and exports from Nigeria to China would not be hindered.”

On the issue of substandard products, it is generally believed that products made in China have short life span and irreparable when damaged.

But the duo of Ukuoha and Onuigbo disparaged this widely belief among Nigerians.

Onuigbo said, unfortunately, what many Nigerians fail to understand is that also China manufactures for Europe and America. Before the emergence of China’s economy, South Korea and Japan were seen by Europe as a base for low-cost labour which offered low production cost and it all translated to low prices of goods.

Speaking on the same development, Ukuoha opined that the issue of substandard China products can be traced to the activities of some unscrupulous nationals of China just like some Nigerians who are always bent on reaping from where they did not sow. “The body language of Mr President should be a lesson to others. And that body language is NAFDAC, SON, CPC and Customs should wake up and discharge their duties diligently.”

African countries where Yuan is a medium of exchange

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, are using the RMB as part of their settlement and reserve currency.

Mauritius is another one of the countries where a growing demand for the Chinese currency has been reported. And while the Bank of Zambia has not yet included the RMB in its reserves, it has pledged to increase its use for trade settlements with China.

During his visit to China in August last year, Kenyan President Uhuru Kenyatta promised to host an RMB clearing house.

In March this year Zimbabwe joined a growing list of countries in Africa and the world using the Chinese currency, yuan, as one of its official currencies after its central bank added the RMB, the Japanese yen, the Australia dollar and the Indian rupee to the existing basket of currencies.

Yuan gaining momentum everywhere

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.

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