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Nigeria, China signs currency swap deal

Nigeria and China recently signed a bilateral agreement to operate a three-year currency-swap deal aimed at facilitating enhanced trade between both countries. At a value of $2.5 billion it translates into N720 billion for Nigeria and RMB15 billion (Chinese Rheminbi, formerly Yuan) for China respectively. The event which took place in Beijing, China saw Governor of the Central Bank of Nigeria (CBN) Mr. Godwin Emefiele standing for Nigeria while Dr Yi Gang of the Peoples Bank of China (PBoC) represented his country. Since the deal was struck, mixed reactions have flowed freely with commendation of the initiative dominating. A currency swap is a process whereby two countries elect to denominate aspects of their mutual trade on a direct exchange between their respective national currencies, instead of a third-party value standard that is extraneous to them, which in the present global system is the US dollar. Under the currency swap arrangement, trade between Nigeria and China will be denominated in a direct exchange between the Naira and China's currency the Rheminbi. By implication therefore traders from the two countries who operate under the scheme may not need to acquire the US dollar to exchange goods and services between them. They will simply operate according to the rate of exchange between the currencies of their respective countries. This development attracts significant benefits for traders in both countries as the Chinese will have at their disposal naira liquidity while the Nigerians will also enjoy liquidity in the Chinese RMB. Hence the development has attracted celebration is several quarters both in Nigeria and China. For Nigerian traders in Chinese imports, the deal seems to be the long-awaited panacea to their headaches over acquiring the US dollar for trading with the Chinese. Just as well it is for Chinese traders with Nigeria, it is an open season for better business. This consideration provided the basis for the negotiation of the deal in the first place. However, the success of any currency swap depends on the eventual take home for the participants in the deal especially when the issue of parity is considered. This is where the Nigeria China currency swap as it stands today throws up some unique challenges that need to be resolved by the former before the celebration begins. For without such considerations the country may end up with the shorter end of a deal that would have deepened her political and economic crisis. The first of such challenges is the state of substantial trade disparity between the two countries with China in the advantage. Nigeria is China's biggest market and the biggest Chinese investment destination in Africa, the country is also the second largest export market and the third largest trading partner to China in Africa. In contrast China buys fewer Nigerian goods. Hence the currency swap is likely to favour Chinese traders. Describing Nigeria as the biggest Chinese investment destination in Africa, it is also easy to appreciate that Nigeria's exports to China are mostly in the area of raw materials and oil, which China needs to drive her galloping economy. source: daily trust

By: Welsh Jeje

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