Why CBN’s Naira-Yuan Swap Ended Without Results

By Kenneth Jukpor

Why CBN’s Naira-Yuan Swap Ended Without Results

Three years ago, precisely on June 6, 2018, the Central Bank of Nigeria (CBN), issued the Regulations for Transactions with Authorized Dealers in Renminbi which provided the framework for implementing the Bilateral Currency Swap Agreement that was concluded on April 27, 2018, at a ceremony in Beijing, China, between Nigeria and China.

CBN and the People’s Bank of China (PBoC) executed the Currency Swap Agreement on behalf of their respective countries.

The swap deal was an agreement with a three (3) year tenor which allows both the CBN and PBoC to swap a maximum amount of fifteen billion renminbi/Chinese yuan (cny 15 billion) for seven hundred and twenty billion naira (N720 billion). This amount is equivalent to $2.5 billion using an exchange rate of N305/$ at the time.

Following this arrangement, traders had smirks of excitement with analysis that Nigerians will be buying those mobile phones and other electronic gadgets mostly imported from China at one-quarter of the previous prices.

As provided in the Regulations, the Currency Swap Agreement was purposely executed to: finance trade and investment between China and Nigeria; maintain financial market stability; and facilitate other connected purposes as may be agreed upon by both countries.

Essentially, the Currency Swap Agreement seeks to create a platform that provides naira liquidity to Chinese firms and investors looking to do business with Nigeria on the one hand; and also provides Chinese Yuan liquidity to Nigerian firms and investors looking to do business with China on the other hand. The Currency Swap Agreement is designed to aid trade transactions between China and Nigeria and remove the need to first source for the “greenback” (US Dollars) before payments for transactions involving the two countries can be made.

According to the Chinese Embassy in Nigeria, China-Nigeria trade is the largest in the continent with an increase of 0.7 percent at $13.66 billion in 2020 over the previous year.

The spokesperson of Zhao Yong, Chargé d’affaires of the Embassy of China in Nigeria disclosed this in an interview with newsmen in Abuja.

His words: “The bilateral trade volume between China and Nigeria was $13.66 billion in 2020, an increase of 0.7 per cent. Among them, China’s exports to Nigeria were $11.58 billion, decreased by 2.4 per cent; imports from Nigeria were $2.09 billion, a year-on-year increase of 22.7 per cent.”

Despite the apparent high trade volume between Nigeria and China and the importance of this currency swap agreement, Nigerians and their Chinese trade counterparts have stuck to the dollar irrespective of the bilateral agreement for currency swap.

Over 70% of Nigerian imports come from China and Asia, while America accounts for just 12%. Why have traders from both nations preferred transacting in dollars? What did CBN do wrong to limit the impact of this initiative?

Speaking with MMS Plus, an economic expert and former Director General of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf gave reasons to show how the trade agreement was doomed to fail from the outset.

According to him, there was no significant impact with the currency swap arrangement because the initial figure which was agreed was around $2.5billion for three years, while the trade between both nations exceeds $10billion annually.

“There are also other issues because I can’t see why Nigerian traders and their Chinese counterparts would prefer naira or yuan to the dollar. The decision of the currency to trade with is for those who are in business and they would continue to prefer the dollar because of its stability and universal acceptance.”

“If a trader wants to import something into Nigeria, how does he convince his Chinese exporter to accept naira with the persistent devaluation of the currency? The principle is to ensure people bypass the dollar and trade directly with yuan for naira but there are lots of complexities that make the average importer or exporter opt for dollar as the default currency,” he said.

According to him, the situation is more pathetic for Nigeria because the naira remains unstable and stability of a currency is a major factor determining its acceptance for trade.

“The idea is actually a good one but the sum made available couldn’t make any material impact whilst other challenges work against it. Naira has further depreciated since that agreement was entered three years ago. The stability of the naira is more critical than the currency swap,” he added.

Also speaking with our correspondent, the Chief Executive Officer (CEO), Quiet Dimensions Limited, Mr. Ime Udoma opined that the fracas between China and the United States of America (USA) may have resulted in some complications that affected the naira/yuan currency swap.

His words; “In Nigeria, traders have to buy dollars to trade with the Chinese and they issue their invoices in the Chinese yuan. The swap would have been a beautiful direct trading and it baffles me that the government was unable to make this process realistic and seamless in three years. However, the difficulties aren’t entirely unexpected because the war between America and China isn’t hidden. It’s a global economic war for major resources around the world and certain projects in Africa. I wouldn’t be surprised if America did some things to ensure this didn’t work.”

Meanwhile, he expressed worry on the multiplicity of loans Nigeria was getting from China especially after the developments in some African countries where China took ownership of their major assets in a bid to recoup their investments.

“I belong to the school of thought that China, like America, is trying to re-colonize African nations. The currency swap mayn’t have produced the desired results but the challenge of currency stability, fixed exchange rates and the agency to oversee it, should be considered,” he said

Describing the policy as one that was meant to be an advantageous deal for Nigerian traders and the nation’s economy, he said, “It was intended to squash the third party arrangement which is the dollar. While it’s given that changing a currency to a change party in order to trade makes the traders lose value, the acceptability of the alternatives also pose challenges.”

Our findings also showed that several Nigerian banks have been unwilling to trade with the Chinese yuan with fears that they would be stuck with the currency while traders would continue to demand the dollar.

A banker with Guarantee Trust Bank who preferred anonymity argued that very few customers have approached his branch in Alaba International Market, Lagos for Chinese yuan since in the last one year as most traders utilize dollars.

In 2018, there were concerns as to the potency of the Currency Swap Agreement to fully address the challenge of dollar demand by importers, since imports from China account for only 20 percent of Nigeria’s annual total imports; however the reality is that the agreement has been of no effect in the nation’s global trade.

The current annual import bill of Nigerian enterprises moving goods into the country from China exceeds N 1.7trillion, meaning that the swap deal amount of N720 billion would have only accounted for about 15 percent of Nigeria’s annual total imports from China. The remaining 85 percent will definitely still require dollars; but at the moment it appears the project didn’t even attain 15 percent.

Despite the concerns raised, experts believe the Currency Swap Agreement is a step in the right direction. The reduction in dollar demand, expected to be achieved through the swap deal, will complement the CBN’s current intervention via the investors’ and exporters’ fx window in deepening stability in the market, by curbing the incidences of dollar scarcity and exchange rate volatility.

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