The success story that has eluded the very famous Nigeria-China Bilateral Currency Exchange Agreement (BCSA) signed over three years ago is a national embarrassment. This underscores the widely held view that our policies are often not well thought out and supported by sufficiently scientific evidence.
Given the bilateral level at which the deal was reached and the official hysteria it sparked, taking stock of its possible collapse is, indeed, a sad tale.
The deal, which began in June 2018, aimed to alleviate the foreign exchange scourge that has plagued the economy over the years. The Central Bank of Nigeria (CBN) had said the BCSA was modeled on trade facilitation – to allow importers of goods from China to transact in Chinese yuan instead of US dollar and vice versa. This was aimed at reducing the demand for the dollar and removing undue pressure on the Nigerian naira at the time – a strategy seen as consistent with the CBN’s naira management strategies.
The agreement therefore aimed to allow the two countries to exchange a total of 15 billion yuan (Renminbi) for 720 billion naira (the equivalent of about 2.5 billion dollars) or vice versa for three years. It would be extended by mutual consent for commercial, financial and direct investment purposes between the People’s Republic of China and the Federal Government of Nigeria, as well as to maintain financial market stability.
There were loud voices against the currency swap so it seemed shrouded in uncertainty. Experts expressed doubts about the deal with China, whose economy is considerably larger and stronger than Nigeria’s and with a solid manufacturing base competing with the United States.
Between 2013 and 2017, China had one of the fastest growing economies in the world, growing on average just over seven percent in real terms per year. In 2015, the People’s Bank of China announced that it would continue to push for full convertibility of the renminbi after the currency was accepted into the IMF’s Special Drawing Rights basket.
At the end of 2015, the Chinese government strengthened capital controls and overseas investment supervision in order to better manage the exchange rate and maintain financial stability. It was in the wake of this that Nigeria proposed to enter into the BCSA deal, which experts say would be of little benefit in the long term. They argued that Nigeria’s imports from China far exceeded its exports to that country.
Figures published in the NBS “Foreign Trade Statistics” for the first quarter of 2021 showed that China dominated the import component of Nigeria’s merchandise trade. This has been the trend for a long time and represents 49 percent (2.01 trillion naira) of 4.17 trillion naira, the total value of imports from Nigeria’s five major trading partners – China, Belgium, the Netherlands, the United States and India, in the first quarter (Q1) of 2021.
Likewise, 30 percent (2.01 trillion naira) of total imports (6.85 trillion naira) from 10 listed countries and others during the period originated from China. Nigerian imports from China have continued to increase exponentially compared to other major trading partners, especially those from Europe, Asia and America.
The NBS report found that the value of Nigerian imports from China over the past five years has increased by 1.63 trillion naira. It increased from 383.9 billion naira in the first quarter of 2017 to 530.98 billion naira in the first quarter of 2018, and rose to 979.3 billion naira in the first quarter of 2019. In the first quarter of 2020, the figure increased. to 1.11 trillion naira and reached 2.01 billion naira in the first quarter. 2021, an increase of 24%.
Three years after the Central Bank of Nigeria (CBN) signed the currency swap agreement with the People’s Bank of China (PBoC), Nigerians have yet to feel the impact of this deal, especially more than the free fall of the naira, which currently stands at N540 / $ 1 in the parallel market, persists.
Analysts fear the naira will depreciate further against the yuan. Indeed, direct conversion into Chinese currency for transactions in China would be cheaper, but that was not going to happen. Instead, traders convert to the US dollar and then the yuan. Unfortunately, unnecessary delays, bureaucracy, and corporate bottlenecks in accessing the yuan have been the experience of most traders involved in business transactions with Chinese companies, which has made matters worse.
In 2018, imports from China accounted for 25.12% of the country’s total imports, while China was not among the top 10 export destinations for Nigerian products. There was a drop in 2019 to 20.49%, which had defied analysts’ expectations, as goods from China are expected to be cheaper, following the currency swap deal, thus increasing our imports from the country. But the reverse was the case.
The target of 720 billion naira to 15 billion yuan to be traded in three years has not been met. Traders and importers still have to convert into US dollars and then into yuan for business transactions with Chinese companies, which is expensive and leads to steadily rising prices of raw materials imported from China, with the cost of operations being passed on to the final price. . consumers. In addition, the value of the naira against the US dollar continues to depreciate, selling for 520 N / US $ at the street market.
At present, Chinese importers have continued to trade in US dollars rather than directly converting into Chinese yuan, despite the currency swap deal of $ 2.5 billion for at least 15 billion yuan ( Renminbi) between Nigeria and China three years ago. The deal did not have the desired impact on the stability of the naira, as bureaucracy and conversion bottlenecks slowed down Nigerians’ use of the window. While Chinese companies preferred to deal in dollars, importers also prefer US dollars as a medium of exchange in trade transactions between them and Chinese companies.
This, however, negates the principle of the currency swap deal, as the process fuels the rise in prices of goods from China, especially with the rate at which the naira trades against the US currency.
It is evident that the BCSA with China did not achieve its objectives as expected by our policymakers who initiated the agreement. We therefore advise that the agreement be reviewed, reorganized and evaluated in depth so that its implementation has the desired effect.