The success story that eluded the highly celebrated Bilateral Currency Swap Agreement (BCSA) between Nigeria and China, executed over three years ago, is a national embarrassment. It underscores the widely-held view that our policies are not often well thought out and backed by sufficiently scientific evidence.
Given the bilateral level at which the deal was struck and the official hysteria it generated, taking stock of its eventual collapse is, indeed, a sad narrative.
The deal, which commenced in June 2018, was intended to ameliorate the foreign exchange scourge that had inflicted the economy over the years. The Central Bank of Nigeria (CBN) had said that the BCSA was inspired by trade facilitation – to allow importers of goods from China to conclude their transactions in the Chinese Yuan instead of the US Dollar and vice-versa. This was meant to reduce the demand for the dollar and lift the undue pressure on the Nigerian Naira at the time – a strategy seen as consistent with the CBN’s naira management strategies.
The agreement was therefore meant to allow the two countries to swap a total of 15 billion yuan (Renminbi) for N720 billion (equivalent of about US$2.5 billion) or vice-versa for three years. It would be extended by mutual consent for the purpose of trade, finance and direct investment between the Peoples’ Republic of China and the Federal Government of Nigeria, as well as to maintain the stability of the financial market.
There were strong voices against the currency swap such that it appeared to be wrapped in uncertainty. Experts expressed misgivings about the deal with China whose economy is overwhelmingly larger and stronger than Nigeria’s and with a strong manufacturing base competing with the US.
Between 2013 and 2017, China had one of the fastest growing economies in the world, averaging slightly more than seven percent real growth per year. In 2015, the People’s Bank of China announced it would continue to carefully push for full convertibility of the Renminbi after the currency was accepted as part of the IMF’s special drawing rights basket.
In late 2015, the Chinese government strengthened capital control and oversight of overseas investments to better manage the exchange rate and maintain financial stability. It was on the heels of this that Nigeria offered to strike the BCSA deal, which experts insisted would hardly benefit her in the long run. They argued that Nigeria’s import from China far exceeded its export to that country.
Figures published in the NBS ‘Foreign Trade in Goods Statistics’ for Q1 2021 showed that China dominated the import component of Nigeria’s merchandise trade. This has been the trend for a long time and it accounts for 49 percent (N2.01 trillion) of N4.17 trillion, the total value of imports from Nigeria’s five major trading partners – China, Belgium, Netherlands, US and India, in the first quarter (Q1) of 2021.
Similarly, 30 percent (N2.01 trillion) of the total imports (N6.85 trillion) from 10 listed countries and others during the period came from China. Nigeria’s imports from China has continued to rise exponentially, compared to other major trading partners, including those in Europe, Asia and America.
The NBS report revealed that Nigeria’s imports value from China in the last five years grew by N1.63 trillion. It rose from N383.9 billion in Q1 2017 to N530.98 billion in Q1 2018, and climbed to N979.3 billion in Q1 2019. In Q1 2020, the figure rose to N1.11 trillion and hit N2.01 trillion in Q1 2021, a rise of 24 percent.
Three years after the Central Bank of Nigeria (CBN) signed the currency swap deal with the People’s Bank of China (PBoC), Nigerians are yet to feel the impact of that arrangement, especially as the free fall of the naira, which is currently standing at N540/$1 at the parallel market, persists.
Analysts have expressed concern that the naira might depreciate further against the yuan. This is because converting directly to the Chinese currency for transactions in China would be cheaper, but that was not going to happen. Instead, traders convert to US dollar and then to the yuan. Sadly, unnecessary delays, bureaucracy and corporate bottlenecks in accessing the yuan have been the experience for most traders involved in business transactions with Chinese firms and this has worsened the situation.
In 2018, imports from China accounted for 25.12 per cent of total imports to the country, while China was not part of the top 10 export destinations of Nigerian products. There was a decline in 2019 to 20.49 per cent, which had defied the expectations of analysts, as goods from China were expected to be cheaper, following the currency swap deal, thereby increasing our imports from the country. But the reverse has been the case.
The target of N720 billion to 15 billion yuan to be swapped in three years has not been met. Traders and importers still have to convert to US dollars and then to the yuan for business transactions with Chinese firms, which is expensive and leads to a constant hike in the prices of commodities imported from China, as the cost of operations is passed to the final consumers. Also, the value of the naira against the US dollar is still depreciating, selling at N520/US$ at the street market.
At present, importers from China have continued to trade in US dollars than convert directly to the Chinese yuan, despite the $2.5 billion currency swap deal for at least 15 billion yuan (Renminbi) between Nigeria and China three years ago. The deal has failed to make the desired impact on the stability of the naira, as bureaucracy and conversion bottlenecks slowed the utilisation of the window by Nigerians. While the Chinese businesses preferred to deal in dollars, importers equally prefer US dollars as a medium of exchange in business transactions between them and Chinese companies.
This, however, negates the principle of the currency swap deal, as the process is fueling hikes in the prices of goods coming from China, especially with the rate at which the naira is trading against the US currency.
It is obvious that the BCSA with China has not achieved its objectives as planned by our policy makers who initiated the deal. We therefore advise that the agreement should be revisited, retooled and thoroughly assessed so that its implementation will have the desired effect.
About the Author
