As Nigeria’s President Muhammadu Buhari prepared for a trip to China, the 22nd country he would be visiting since he was sworn in on May 29, 2015, many Nigerians who were starting to lose faith in the president and the change he promised hoped he impressed them this time and make the long journey to China productive. Buhari did not disappoint.
Nigeria is experiencing its worst economic crisis in years and hopes were high President Buhari who won election on the mantra of change would revive the economy and help put an end to years of infrastructural decay. Most African countries have relied on China for infrastructural development and it was expected that Buhari’s government would look no further than China to help build infrastructure in Africa’s largest economy. The president had also put power and agriculture high on his agenda for the visit.
Buhari is paying a state visit to China at the invitation of Chinese President Xi Jinping, who on Tuesday called for improved cooperation between the two countries. After talks, the two presidents witnessed the signing of several deals of cooperation, including a currency swap agreement which allows importers of goods from China to conclude their transactions in the Chinese currency, the Renminbi (Yuan), instead of the dollar.
“It means that the renminbi (Yuan) is free to flow among different banks in Nigeria, and the renminbi has been included in the foreign exchange reserves of Nigeria,” Lin Songtian, director general of the African affairs department of China’s foreign ministry, told reporters in Beijing after the agreement was signed by the Governors of Nigeria’s central bank and the Industrial and Commercial Bank of China Ltd. (ICBC).
Nigeria is not the first country that China would enter into such agreement with. The Asian powerhouse has multiple year currency swap agreements of the Renminbi with Argentina, Belarus, Brazil, Hong Kong, Iceland, Indonesia, Malaysia,Singapore, South Korea, United Kingdom and Uzbekistan. According to the People’s Bank of China (PBoC), those swap agreements were intended not only to “stabilize the international financial market,” but also to “facilitate bilateral trade and investment.”
The central bank currency swap (CBCS) consists of an agreement between two central banks, at least one of which must be an international currency issuer, to swap their currencies. The central banks party to the swap transaction can lend the proceeds of the swap, against collaterals they deem adequate, to the commercial banks within their jurisdiction, to provide them with temporary liquidity in a foreign currency.
How currency swap agreements work
At the start of a swap, central bank 1 sells a specified amount of currency A to central bank 2 in exchange for currency B at the prevailing market exchange rate. Central bank 1 agrees to buy back its currency at the same exchange rate on a specified future date. Central bank 1 then uses the currency B it has obtained through the swap to lend on to local banks or corporations. On the specified future date that the swap unwinds and the funds are returned, central bank 1, which requested activation of the swap, pays interest to central bank 2. — Council on foreign relations
CBCS emerged as a result of the 2007- 2009 financial crisis. Although for China, it is not a reaction to an emergency situation but a way of expanding the influence of the renminbi, without significant changes to its capital account. Under normal circumstances, the deal is a win-win. For China, trade with Nigeria becomes easier as payments for goods can be done in Yuan. Nigeria, on the other hand, have a chance to strengthen its currency, as all trades with China now done with the Yuan reducing dollar shortages as demand drops. Over 70 percent of Nigerian imports are from China. But the swap deal is not between two central banks, it is between the Central Bank of Nigeria (CBN) and the ICBC, the world’s largest bank by total assets and by market capitalization. While this may not affect the swap deal in any way, as the ICBC is owned by the government, it raises questions that Nigerian leaders who were in China to broker the deal must answer.
Why is the currency swap not with the People’s Bank of China as the case has been with other countries? How much was agreed to be swapped? (Swap agreements are never shrouded in secrecy) Who initiated the swap?
China’s swap agreements since 2009
President Buhari ends his one-week trip today, and when he returns (with CBN Governor Godwin Emefiele), these questions will be raised for better understanding of the deal. Apart from the clarifications needed on the swap deal, the president comes bearing good news. He has secured a $6 billion infrastructure loan and a $15 million agricultural assistance fund. China has also promised to increase scholarship awards to Nigerian students to 700 annually from about 100. The Asian powerhouse will also give 1,000 Nigerians vocational and technical training by China annually.
Chinese Premier Li Keqiang said in a meeting with President Buhari on Wednesday that China was willing to join hands with Nigeria to contribute to regional and world economic recovery and growth.