Before the Yuan cometh

There were two very significant results out of President Muhammadu Buhari’s week-long visit to China last week, the most interesting one being the signing of a currency swap agreement on Tuesday. The deal was signed in Beijing between Industrial and Commercial Bank of China Ltd (ICBC), which is China’s largest bank as well as the […]

There were two very significant results out of President Muhammadu Buhari’s week-long visit to China last week, the most interesting one being the signing of a currency swap agreement on Tuesday. The deal was signed in Beijing between Industrial and Commercial Bank of China Ltd (ICBC), which is China’s largest bank as well as the world’s biggest money lender, and the Central Bank of Nigeria, CBN. President Buhari and the Chinese President Xi Jinping both witnessed the signing ceremony. 
The second major outcome of Buhari’s visit was China’s offer of a $6 billion loan to fund Nigeria budget deficit of N2.2 trillion ($11.1 billion). Lin Songtian, director general of the African Affairs department of China’s Foreign Ministry said of the currency deal, “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.”
The currency deal with China is a very important response to the country’s current challenges occasioned by the sharp drop in international crude oil prices and Nigeria’s sharply reduced foreign exchange. Finance Minister Kemi Adeosun also said government is considering investing in Panda bonds. These are renminbi denominated bonds sold in China by foreign entities.  Although the official explanation is that these would be cheaper than Euro-bonds, it is also feared that the cautious disposition of Western investors over Nigeria’s monetary policy reduces the probability of success with Euro-bonds.  Government was therefore right to explore its options.
Even though details are still scanty, what is known at this point is that trade transactions between Nigeria and China would now cut out the US dollar as the compulsory middle currency. This will immediately reduce demand for dollars from the Central Bank, China being Nigeria’s largest source of imports. However, the deal throws up some issues. First, cutting out the dollar would facilitate Nigeria-China trade and could boost our imports from China. Such an outcome will however stymie government’s efforts to boost local industry.
A 2015 estimate puts our current account balance at a deficit of $8.8 billion.  In other words, we do not export enough to pay for our imports.  As of 2014, our major import partners were China (25.3%), US (9.7%) and India (4.7%).  We import mainly machinery, chemicals, transport equipment, manufactured goods, food and live animals.  We hope that the Federal Government’s focus on agriculture and solid minerals would at least take food and chemicals off that list.  Minister of Finance Adeosun has said that we would start exporting tomato paste this year and rice by 2018.
The currency deal does not spare us from the task of earning Yuans to pay for Chinese imports. That is, we must increase the volume of exports to China.  This calls for a concerted policy to identify products for export and boost their volume and quality so they can be competitive in Chinese and other markets. The $6 billion Chinese loan also leaves analysts scratching their heads.  What is in it for China? Since the Chinese government is not a charity organization, it would not fund Nigeria’s infrastructure projects and give Nigeria the economic heft to be less dependent on Chinese imports, unless it works out a hefty benefit somewhere else.
While the Chinese may not harbour unwholesome intentions, it is clearly strategic for them to plant themselves firmly in Africa’s largest economy, with an eye to the future.  Parallels could be drawn with the patient disposition of Japan when it heavily invested in South East Asia’s industry.  Now, it dominates their automotive market.  Rising labour costs at home also make it imperative for China to look for alternative production centers. While we are celebrating our gains from this deal, government should engage experts to take a hard look at the future. We have had raw deals from Westerners for decades but we should not replace one slave master with another, or even add to the number of our slave masters.