Nigeria-China trade imbalance widens despite currency swap

• Nation’s share of trade volume since 2013 is 11% 
• China missing in top 10 trading partner chart

Nigeria appears to be getting the short end of the stick in its bilateral trade relations with China, as the Asian giant runs rings round Africa.

Statistics show that the historically lopsided trade relations may have worsened since the implementation of the Bilateral Currency Swap Agreement (BCSA) signed two years ago, as Nigeria’s export to China lags behind the huge yearly import volumes.  

Nigerian Bureau of Statistics’ (NBS) data indicate that Nigeria’s share of the trade volume from 2013 to the first quarter of this year staggers at 11 percent. The value of Nigeria’s total export for the eight-year period was N2.023 trillion as against the N16.2 trillion the country frittered away on goods brought in from China.

As small as the figures are, Nigeria’s export is dominated by primary products like polymer, natural rubber, tin, granite and charcoal, which production do not support expanded value chain that create sufficient jobs. Some of them are processed in China and sent back to Nigeria as part of the large menu of finished products Nigerians import for immediate consumption.   

Although the idea was first touted between 2011 and 2014 during the regime of Goodluck Jonathan, the major selling point for the Nigeria-China currency swap agreement was in 2016 when a newly-inaugurated Muhammadu Buhari administration mooted the idea again to boost local production through faster and cheaper access to Chinese technology, including machinery. Two years into the widely-publicised agreement, Nigeria still rely on cheaper Chinese goods as local manufacturing has yet to kick in.

“It is a mere trifle,” Dr Bongo Adi, who runs a Faculty at the Lagos Business School (LBS), told The Guardian in a telephone conversation on the Currency Swap Agreement. “One is hard-pressed to see how it significantly leverages our exchange rates. Some importers have also complained about the difficulty in assessing it,” Dr Adi remarked.

He argued that Chinese import was roughly between 15 and 20 percent of Nigeria’s foreign demand, whereas Nigeria-China trade reached about N2trillion in the first half (H1) of 2019 and the swap deal amounts to N720 billion. “What this implies is that, though the deal takes some pressure off the forex market, it is just 36 percent of China trade. Nigeria’s total trade in the corresponding period is almost N10 trillion; so, the pressure off the forex demand is just a paltry seven (7) percent This does not amount to much in the general scheme of things. But given where we are, any little reprieve is good.”

Trade data of 2019 when the agreement came into full effect were expected to show fairer trade relations. Sadly, Nigeria’s import from China leaped by 68 percent, climbing from N2.9 trillion recorded in 2018 to N4.9 trillion. The value of export inched further but by less than 60 percent. The improved performance saw the country’s low export to China move from N378 billion in 2018 to N596 billion in 2019.

While the 2020 performance may be too early to call, the Quarter One (Q1) trade result seems to have proved wrong those who thought Nigeria needed more time to take advantage of the deal to tap into the huge Chinese market. The trade imbalance continued with the total exports (majorly extractive commodities) floundered, with China – a country neck-deep in the COVID-19 pandemic then – cornering over 90 percent of the trade value.

Economists agree that wanton imports constitute leakage to any domestic economy while export is a veritable injection to a country’s Gross Domestic Product (GDP) and employment creation.

Countries explore opportunities in comparative production advantage to create more value through bilateral trade agreements. But Nigeria-China trade flow has been lopsided, with the former struggling since the rise of China, which controls close to one-third of global manufacturing.  

The currency swap deal was meant to close the gap through quicker technology transfer. Two years into the deal, recent data look like warning signs the Beijing pact may have exposed the domestic market to graver unhealthy competition.

Trade experts had warned that Nigeria did not stand a chance with China. The East Asian country has not featured on the top 10 Nigeria’s trading partners for as far as data can support. In 2013, the top 10 trading allies were India, The Netherlands, Brazil, the United States, Spain, Italy, France, the United Kingdom, South Africa and Ivory Coast. 

A few of these countries, like Ivory Coast and Brazil, were displaced with new names, Canada, Turkey, Togo and Indonesia securing spots. But China has remained an odd name in the arrangement while its rival India has been the table topper.  

Whereas India has remained a reliable importer of Nigeria’s commodities, especially crude, China has been, in the past decade, the largest beneficiary of Nigeria’s import bills. Of the value accruing to Asia, China takes between 50 and 60 percent without a compensating response. 

China’s domineering trade pattern may not be targeted at Nigeria after all. Its “factor abundance advantage” works for its global overbearing trade stance, giving it the privilege of producing almost all commodities at much cheaper cost than the rest of the world. Dr Adi believes China’s unmatched capacity should have been considered before the Nigerian government signed the BCSA. 

With one year to go on the three-year deal, experts still believe the agreement was unnecessary. The Nigeria-China currency exchange deal is not an isolated case. Currency swap is part of its broad global trade strategy and renminbi internationalisation agenda. 

As a follow-up to its cross-border renminbi settlement pilot project, China kicked off an aggressive currency swap agreements in 2020, leading to a pact with Argentina, Belarus, Brazil, Canada, Hong Kong, Iceland, Indonesia, Malaysia, Singapore, South Korea, Thailand, the United Kingdom and a few others. This has led to steady growth of the adoption of the renminbi as an alternative global currency. 

BCSA, which is increasingly gaining wider popularity as a trade facilitator, is an agreement between two parties, which could be countries, where the parties exchange a principle and interest of one currency for a principle and interest of another currency with the intention of getting a better deal. It saves the parties of the cost and stress of going through the foreign market for settlement of transactions.   

In the case of Nigeria-China currency swap pact, transactions sealed within the agreement do not require going through a third party currency (normally the dollar) as parties to the transaction do not necessarily convert to the dollar before a switch to the naira or renminbi for settlement. It reduces the hitherto double conversion to a single process and eliminates the use of correspondence bank.

In principle, currency swap eliminates the transaction costs associated with double conversion, ease pressure on currencies involved and increase trade turnaround. But market players have stated that the BCSA signed between the Central Bank of Nigeria (CBN) and the People’s Bank of China (PBoC) has yet to yield the desired impacts. 

This, according to Uche Uwaleke, a professor of capital market at the Nasarawa State University, Keffi, may not be unconnected with the relatively small size of the swap put at 180 billion yuan.

Uwaleke argued that the currency swap deals could only benefit both parties where trade between the countries was fairly balanced. 
He insisted that until Nigeria developed sufficient exports for the Chinese market to fairly match imports from that country, the impact of a currency swap on the economy may not be significant.

“Regarding the celebrated currency swap deal established between the Industrial and Commercial Bank of China and the CBN sometime in 2017, its impact on the Nigerian economy, in my opinion, has yet to be remarkably felt.

“May I repeat that until Nigeria develops sufficient exports for the Chinese market to fairly match imports from that country, the impact of a currency swap on the economy may not be significant,” he noted.He said the swap arrangement was entered into by Nigeria against the backdrop of the rapidly growing bilateral trade with China. 

According to him, the expectation was that it would reduce the pressure on the US dollar and help strengthen naira since Nigerian traders, who import from China, could conclude their transactions in Yuan instead of looking for the US dollar.

However, he said that with Chinese exports accounting for about 80 percent of the total bilateral trade volumes, it would be difficult for Nigeria to reap any commensurate benefit from the swap deal, given the huge trade imbalance against the country.
He wondered why two years after implementation, not much is in the public space by way of information on the implementation of the currency swap deal with China. He urged the CBN to ensure proper evaluation of the pros and cons of the deal for Nigeria before any renewal is contemplated.

For a Professor of Economics, Olabisi Onabanjo University, Sheriffdeen Tella, the deal was a good plan given the amount of trade between China and the Nigerian private sector in particular. He, however, stated that China’s purchase of Nigeria oil had dropped considerably since that time.

“As a result, we will have to fund that Chinese currency account with dollars instead of the Chinese payment into the account. So, the problem is the underfunding of the account due to a significant shortfall in oil receipts from China. 

“Hopefully, now that the IMF has recognised the Chinese Yuan as an international payment currency, things might change for good for the arrangement and make it easy to achieve the objectives.

“There is no official complaint or report of success from the CBN but for me, it is not yet successful and it is because of the drastic fall in demand for our oil by China,” Tella said.

The President, Association of Bureaux De Change Operators of Nigeria (ABCON), Alhaji Aminu Gwadabe said the naira-renminbi swap had grossly not been utilised to its fullest.

According to him, the dollar had remained the dominant currency of imports since its inception, thereby making it impossible for Nigerians to reap the benefit of the deal.