- Nigeria must exploit the advantages to the fullest
Now that the long-awaited bilateral currency exchange agreement between Nigeria and China has finally been signed, it is crucial that Nigeria ensures that it reaps the benefits while keeping the drawbacks to a minimum.
The currency swap deal is worth the equivalent of US$2.35 billion. It allows both parties to exchange the equivalent of 15 billion Chinese Yuan for 720 billion naira, or vice versa, over the next three years, and is renewable. Nigeria becomes the fourth African participant after South Africa, Zimbabwe and Ghana.
The advantages are obvious. Instead of enduring the difficulties of going through the American dollar, both nations will be able to engage in simpler and more direct two-way deals. Consequently, dollar demand by Nigerian firms is likely to be lessened, as businesses trading with China will no longer need to use it. That in turn could have beneficial effects on the exchange rate of the naira, with obvious multiplier effects for the country’s economy.
However, the potential shortcomings are just as obvious. Perhaps the most glaring is the fact that China is by far the larger of the two trading partners. In 2017, Nigeria’s imports from China totalled N1.8 trillion, while its exports amounted to just N220.6 billion. Chinese business and industry are thus in a much more advantageous position, and are very likely to exploit their built-in strengths to the fullest. This could mean that Nigeria’s already-sizeable trade deficit with China could widen even further.
Then there are the technical issues. At present, only four Nigerian banks have offices in China. Of these, only two meet the Chinese condition of having a minimum balance sheet of $20 billion to access its clearing house through which swaps will be conducted. On the Nigerian side, the Central Bank of Nigeria (CBN) requires all settlement banks to have N15 billion in treasury bills that will be used as collateral. This requirement limits the number of banks which can participate in the swap arrangement.
These problems do not reduce the significance of the agreement, however. China’s pre-eminent and growing importance in global trade makes it a vital partner in the attainment of Nigeria’s ambitious plans for economic growth. The Chinese appetite for agricultural products and minerals synchronizes perfectly with Nigeria’s own desire to expand its non-oil export capacity.
It is incumbent upon the Federal Government to ensure that the country is fully prepared to meet the challenges posed by the currency swap deal. Industrial and business concerns must be able to respond with the efficiency required to become reliable partners with their Chinese counterparts. Participating banks must ensure that transactions are not hampered by red tape and other bureaucratic bottlenecks. Disputes must be settled quickly and fairly.
Deliberate attempts must be made to ensure that the bulk of business is not done in crude oil or primary products; that would only amount to replicating trade patterns that Nigeria is seeking to move away from. Business in agricultural products and minerals, for example, should emphasize value-addition. Joint-venture companies should have a bias for Nigerian-based manufacture, as opposed to wholesale importation. Chinese investment in the country must incorporate technology-transfer agreements.
Nigeria cannot out-manufacture China, but there is no reason why basic components for industrial and electronic equipment cannot be made here. As Chinese manufacturing costs rise as a result of its increasing prosperity, low-cost manufacturing will inevitably move to nations that are prepared to receive it. Nigeria should position itself to be such a country.
The currency exchange agreement is an indication of the country’s readiness to take its rightful place in the arena of world trade, but it will succeed only if intentions are complemented by resolute action.