Naira and Yuan Swap Deal: Matters Arising —By Offum Peter Francis 22:16 1 COMMENT If you are not automatically redirected, click here. Offum Peter Francis|20 April 2016| 6:17am In his visit to the People's Republic of China, President Muhammadu Buhari struck a historic deal. The President and the Governor of Central Bank of Nigeria (CBN), Mr. Godwin Emefiele signed the agreement with the Industrial and Commercial Bank of China Ltd. (ICBC) on 12th of April, 2016 in Beijing, China. It is an agreement to allow the direct exchange of Naira for Yuan and bypassing the Dollar. The deal was widely cheered and greeted by a deep sense of nationalistic pride. It is the latest attempt by the Nigerian authorities to save the Naira from further slump in the foreign exchange market. However, Authorities have ignored repeated calls from the International Monetary Fund (IMF) and the West to devalue the naira. The deal A currency swap is an agreement between two parties in which the parties to the contract exchange the principal of two different currencies immediately, so that each party has the use of the different currency. They also make interest payments to each other on the principal during the contract term depending on the party initiating the deal. When the contract ends, the parties re-exchange the principal amount of the swap. In simple terms, the CBN will exchange a certain amount of Naira for a certain amount of Chinese Yuan using the prevailing exchange rate of N30 to CNY 1. The CBN will further loan the Yuan to the Deposit Money Banks (DMBs) who will make it available to the public. The agreement places Nigeria as the clearing house for Yuan denominated transactions for the whole of Africa. It means other African countries can source for Yuan in Nigerian banks. Meanwhile, several media sources reported that the Director-General of the African Affairs Department of China's Foreign Ministry, Lin Songtian, told reporters in Beijing after the agreement was signed that the Renmimbi (Yuan) is free to flow among different banks in Nigeria and has been included in the foreign exchange reserves of Nigeria. Before the deal The Naira has been on a free fall since last year due to a sharp decline in the price of oil, depleting reserves, low productive base and import dependent structure of the Nigerian economy. There exists a gulf between the official exchange rate and the rate at the parallel market (Bureau de change) due to scarcity of foreign currencies, mostly, the US dollar. The official exchange rate of the Naira to the US Dollar has remained at N197 to US$1. At the parallel market, the rate is N310 to US$1 after Naira appreciated by N10 against the dollar over weekend. The exchange rate between the US Dollar and Chinese Yuan is US$1 to CNY6. With the Naira overvalued, the exchange rate between the Naira and Chinese Yuan is N30 to CNY1. It follows that N180= CNY6 = US$1. But the shortage of the Dollar has led to the parallel market rate of about N310 to US$1. China has the world's second-largest economy in terms of nominal GDP, totalling approximately US $10.82 trillion according to the International Monetary Fund. Data from the National Bureau of Statistics (NBS) show that as of the last quarter of 2015, China was Nigeria's largest trading partners with imports from China constituting about 23.4%of her total import bill. China has also had a currency swap deal with other countries including Argentina, Brazil, Hong Kong, Belarus, Malaysia, Iceland, South Korea, Uzbekistan, United Kingdom, Singapore and Indonesia. Following the recognition of Yuan as a likely global reserves currency, Ghana, South Africa and Zimbabwe have integrated the currency into their financial markets. Matters Arising The deal was necessitated by the need to halt the free fall of the Naira against the Dollar. Presidency sources posit that the essence of the deal is to shore up the nation's currency in the foreign exchange market. The immediate impact of the deal was the appreciation of the Naira at the parallel market. The President, Association of Bureau De Change Operators of Nigeria, Mr. Aminu Gwadabe, in an interview with the News Agency of Nigeria (NAN), in the past weekend in Abuja, stated that since the announcement of the Naira and Yuan swap, the Naira had appreciated by N10 against the dollar. He added that the Dollar was now changing for N310 as against the former rate of N320 and predicted that once the policy is in force, the price of Dollar will continue to fall. Disturbing Dark Spots No doubt, the deal will trigger a fall in the demand for Dollars, with a concomitant appreciation in the value of the Naira. In addition, the deal will, inevitably, eliminate rigidities in transactions between Nigerian businessmen and their Chinese counterparts because the Dollar link in the chain of payments between Nigeria and China will be eradicated. There will be continuous availability of the Yuan since settlement for oil sales to China will be made in Yuan. Beyond merits of these, there are some issues of concern; It is expected that a deal of this nature should be signed by the apex banks of both countries. In this case, the CBN represented the Nigerian side while the ICBC Ltd., a state-owned commercial bank which is reputed as the largest bank in the world by total asset and market capitalisation stood in for China. Why was the People's Bank of China (PBoC) which is China's apex bank not involved in the deal? Secondly, the details of the deal was not revealed. The public is kept at the dark on the elements of the deal, that is, the principal, the duration, the interest and the party paying the interest. Thirdly, the deal seems like a short-term solution to a long-term problem. It is the latest lifeline to rescue the drowning Naira. There are chances that there may be disparities between the official exchange rate of the Naira and Yuan and the rate at the parallel market. A situation that may result in another exchange rate volatility in future. Lastly, the deal may be counter- productive to our local industries since Chinese imports may be cheaper than locally-made goods. It will inspire a sense of complacency, thereby, diminishing the zeal and incentives for domestic production, which will, further aggravate the vulnerability of the Naira in the foreign exchange market. In conclusion, the Naira and Yuan swap deal is worth celebrating, at least for the moment. Authorities and policy makers should not lose sight of the need to diversify the economy and promote export-oriented initiatives in order to usher the Nigerian economy into a path of sustainable growth and shared prosperity. Offum Peter Francis Is a Scholar pushing for good governance, inclusive growth and shared prosperity.

Well written. Let be hopeful that in the longrun, we would fix the real cause of the sickness of Naira.

i damnly concur