THE NAIRA/YUAN SWAP DEAL

MONDAY EDITORIAL

The deal is laden with pitfalls

 In a swap deal expected to provide local currency liquidity for both Nigerian and Chinese businessmen, the Central Bank of Nigeria (CBN) and the Peoples Bank of China (PBoC) recently signed an agreement on a transaction valued at Renminbi (RMB) 16 billion, the equivalent of about $2.5bn. Both the CBN Governor, Godwin Emefiele, and the Director General of the African Affairs Department of China’s foreign ministry, Lin Songtian, spoke glowingly about the deal. “The essence of the mandate is to ensure that Nigeria is designated as the trading hub with China in the West African sub-region for people who want the Renminbi as a currency denomination,” argues Emefiele while Lin contends that the deal “means that the Renminbi (Yuan) is free to flow among different banks in Nigeria and has been included in the foreign reserves of Nigeria.”

For sure, a currency swap deal means that the Chinese Yuan would begin to rank with dollar, Euro and to a little extent, pounds sterling as a second currency in Nigeria. It also means that Nigerian banks can open letters of credit in Yuan instead of the dollar, euro or sterling. Theoretically, this deal will enhance trade between the two countries. From a currency risk management perspective, by including the Yuan in our foreign reserve basket, we reduce the exposure of our foreign reserve to the volatility risk of any single currency, especially the dollar.

Aside the fact that the deal shields Nigerian businessmen from the vagaries of third currency fluctuations, it is now also easier for Chinese manufacturers seeking to buy raw materials from the Nigerian market to obtain naira from Chinese banks to pay for their imports. Many countries now have this kind of agreement with China in what can be described as a win-win situation in an increasingly interdependent global market situation. Notwithstanding, there are genuine fears that Nigeria might still not enjoy the benefits of this deal under the current prevailing environment.

As we stated in an earlier editorial on the issue, there are too many questions left hanging. China has historically been accused by Western nations of artificially weakening the Yuan to encourage export, implying that a weaker Yuan gives China an undue advantage over other stronger currency nations. The converse will also be correct: a weaker Yuan will discourage import of foreign goods into China as their prices would become uncompetitive. Therefore, on this swap deal, will Nigeria also fall prey to a relatively weaker Yuan especially given the current balance of trade in favour of China?

China is a trading partner in the purchase of our crude oil, which is responsible for over 80 per cent of our foreign exchange earnings. If China now pays for that with Yuan, our stock of Yuan increases while our dollar receipts will decrease by the same amount. But the relevant question here is: given the balance of trade between China and Nigeria of over US$14billion and growing, will the Yuan supply gap in Nigeria not imply an upward rate push eventually of the Yuan thus bringing us back to square one? Besides, from where are we going to get enough Yuan to stabilise the naira and keep it strong since that appears to be the main economic objective of the administration?

Put differently, we must do something to earn Yuan except we are borrowing from China and if we borrow, we must pay someday. If we don’t, then we must sell something to China to be able to trade in that currency. The point we are making is that other than oil, we have nothing more to sell to China but we buy so many things from China. Therefore, in implementing the Swap, we hope the authorities will take these concerns into consideration.