Nigeria is expanding its trade and investment relationship with China with a bilateral local currency swap deal worth 720 billion naira. But while this a positive development, it is not without some downsides.

China’s Central Bank, People’s Bank of China (PBOC), said on Thursday it has signed a three-year bilateral currency swap agreement with Nigeria worth 15 billion yuan (N 720 billion). It was also stated on the bank’s website that the swap deal will facilitate trade and investment, and safeguard the stability of financial markets of both countries.

“On April 27, 2018, with the approval of the State Council, the People’s Bank of China signed a bilateral local currency swap agreement with the Central Bank of Nigeria in Beijing for the purpose of facilitating bilateral trade and direct investment and safeguarding financial market stability in both countries. The size of the swap facility is RMB 15 billion/NGN 720 billion. The agreement is valid for three years and can be extended upon mutual consent,” the statement read.

The currency swap deal had been proposed a year into the administration of President Muhammadu Buhari, but had failed to materialize till now. The arrangement between the two countries to trade in their own local currencies, paying for import and export trade at pre-determined rates of exchange will shield investors from exchange risks and boost trade between both countries.

However, critics have often complained about the trade imbalance between Nigeria and China; how these trade deals end up turning Nigeria into a dumping site for Chinese products.

But the deal definitely has its own benefits, especially for local entrepreneurs looking to the Chinese market, and if the government is able to lure Chinese investors to move manufacturing units to the country, this would put the country in a favourable trade position with China.

The deal has its own downsides also as it could potentially weaken Nigeria’s domestic production of some goods. This is because importers would have easy access to the Chinese Yuan to bring in cheap goods rather than produce within the country. As at the end of 2017, the volume of trade between Nigeria and China was put at $2.7 billion, making Nigeria the third largest African partner with China. But this relationship so far has been lopsided with Chinese imports accounting for a major chunk of the transaction.

China is rather familiar with these swap deals, having signed with more than 30 countries since 2008 with the biggest being the 400 billion yuan currency swap with Hong Kong in November 2014. One major reason for signing these deals is for broader use of the Renminbi in trade and finance, thereby helping to expand China’s influence as a global economic power.

Comments

Elsewhere on Ventures

Triangle arrow