As a way of finding solutions to the current currency slump in Nigeria, the Industrial and Commercial Bank of China Ltd (ICBC) and Nigeria’s Central Bank signed a deal on Yuan transactions.
The currency swap will allow Nigerian business persons and traders to conduct their transactions with the use of the Chinese Yuan. Almost all Nigeria’s international trade is done in dollars, hence putting a lot of strain on the naira. By making the Yaun the transaction currency in Nigeria-China trade relations – which makes up for more than 70 percent of Nigeria’s imports.
Also in accordance with the currency swap agreement, the Central bank of Nigeria is also expected to diversify a large quantity of the Nigerian foreign reserve from the US Dollars to the Chinese Yuan.
While many financial experts said that the deal will strengthen the bilateral trade relations between Nigeria and China as the second largest economy in the world, others advised Nigerian government to tread with caution, in order to curtail influx of fake and substandard goods into the local markets. A former President, National Union of Banks, Insurance and Financial Institutions Employees, NUBIFIE, Mr. Ade Martins-Odigie, who is also a financial expert, spoke with Sunday Vanguard on what Nigeria stands to benefit if the currency swap deal is successfully done.
As a financial expert, what is currency swap agreement and what will Nigeria benefit from this type of policy, especially now that government is trying to diversify the economy into non-oil export sectors?
Currency swap agreement between China and Nigeria simply means that dollar will no longer be used for import/export trade, projects financing and all forms of business transactions between the two countries under this agreement. If successfully done, the currency swap deal will pave the way for crude oil export from Nigeria to China to be carried out using the Chinese currency, which is the Yuan. This implies that the demand for dollar through Nigerian commercial banks will reduce, since business transactions between the two countries will be done in Yuan instead of dollar. It will further enhance business flexibility between both countries.
There are many economic benefits from this type of business agreement, because in doing business with China, we will not need to buy dollar and begin to convert it, especially now that Nigeria’s economy is experiencing forex crisis. This is a good economic policy in the sense that excessive demand for dollar will reduce in Nigeria. Aside from the fact that the policy will crash down increasing demand for dollar, a lot of people will be encouraged to do business with Asia, instead of Europe.
At present, we engage in foreign trades using dollar, which has made the demand for dollar to increase speedily. So, with the proposed trade policy on currency swap between Nigeria and China, it means Nigerian government can carry out all transactions with China using their local currency, the Yuan, and such businesses can be done at their official rate. On the other hand, China can also do business with Nigeria using our own local currency, which is the Naira, and at our own official rate.
Currently, the exchange rate for the Naira is about 340 per dollar, even as the demand for forex is on the increase, are you saying that currency swap deal will strengthen the Naira and curtail inflation rate, which is already double digit at 12 percent?
The reality is that if successfully done the currency swap agreement between China and Nigeria will take away pressure on forex in the short term. This is because Nigeria is importing more items while China is an exporting country. Therefore, this policy will gradually increase the volume of trade for Nigeria, but it may not curtail inflation because of the state of our infrastructure. For us to reduce the inflation rate, government must provide infrastructure to ensure manufacturing of goods locally.
What is your take on the issue of substandard goods coming into Nigeria?
With this type of policy, Nigeria’s economy may experience more influx of substandard goods from China. For instance, already, there are many substandard goods coming from China into Nigeria. Therefore, with the currency swap trade agreement, the number of such goods will increase. Private business owners as well as investors will also be affected, as goods coming from Europe to Nigeria will be much more expensive since such importers are using dollar, but goods from China will be cheaper than the ones from Europe, with the currency swap agreement. As such, more people will buy the cheaper goods.” This means both countries will have to discuss the issue of substandard goods to ensure a win-win situation”.
Government has concluded plans to borrow $2billion from China. Don’t you think this will increase Nigeria’s debt profile, now that the economy is in a slow down?
Though it is not good to accumulate debts for the country, but getting external loan can help in financing capital projects, which will in turn boost economic activities to create jobs in the country. In that capacity, borrowing such amount can help various sectors of the economy, if the money is adequately utilised for the intended purpose.