The Sea Empowerment Research Centre has warned that the recently signed $2bn Nigeria, China currency swap deal may mar Nigeria’s active participation in the African Continental Free Trade Area (AfCFTA) agreement.
In its End of the Year Bulleting made available to the Nigerian Tribune at the weekend, the Centre also warned that the deal may lead to increased debt burden given the fact that Nigeria is heavily indebted to China through loans borrowed to implement different projects in the country.
According to the report which was signed by the Centre’s Head of Research, Eugene Nweke, “By way of background, it is important to establish the fact that the China-Nigeria currency swap deal have both positive and negative impacts on the economy, trading public, and the nation.
“On the positive side, the deal is expected to enhance trade and investment between the two nations, with trade between Nigeria and China accounting for nearly 30 percent of Nigeria’s total trade.
“The agreement will also bolster financial cooperation and promote the broader use of the yuan and naira in bilateral transactions, reducing reliance on third-party currencies like the US dollar.
“The deal is also anticipated to deepen economic ties, facilitate cross-border trade, and encourage investment.
“By providing naira liquidity to Chinese businesses and RMB liquidity to Nigerian companies, the agreement will improve the speed, convenience, and volume of transactions between the two countries. This can lead to increased economic activity, job creation, and growth.
“However, it is instructive to posit here that there are also potential disadvantages to consider with respect to the swap deal. This includes but is not limited to:
“Trade imbalance between Nigeria and China: With Nigeria importing much more from China than it exports, this can lead to a significant outflow of foreign exchange, putting pressure on Nigeria’s external reserves.
“Another concern is the potential for currency fluctuations, which can affect the value of the naira and the yuan. If the naira depreciates significantly against the yuan, it could make Nigerian exports more expensive and less competitive in the Chinese market.
“There is also the dependence on Chinese imports. This could also limit Nigeria’s ability to develop its own manufacturing sector and reduce its reliance on foreign goods.
“There is also the risk of increased debt burden given the fact that Nigeria has borrowed heavily from the Chinese government. The currency swap deal may not necessarily reduce Nigeria’s debt burden, as the country is still obligated to repay the loans borrowed from China. The deal may only provide temporary relief by allowing Nigeria to pay its debts in yuan instead of US dollars, but it does not address the underlying issue of debt sustainability.
“Dependence on Chinese Funding: The currency swap deal may further increase Nigeria’s dependence on Chinese funding, which could limit the country’s ability to negotiate favorable terms or seek alternative funding sources. This dependence could also compromise Nigeria’s sovereignty and independence in its economic decision-making.
“Risk of Debt Trap: The currency swap deal may lead to a debt trap, where Nigeria becomes increasingly indebted to China and is unable to repay its loans. This could result in China gaining significant control over Nigeria’s economy and natural resources, which could have long-term consequences for the country’s development and sovereignty.
“Limited Fiscal Space: The currency swap deal may limit Nigeria’s fiscal space, as the country may be required to allocate a significant portion of its budget to service its debts to China. This could reduce the government’s ability to invest in critical sectors such as education, healthcare, and infrastructure, which are essential for the country’s development.
“Exchange Rate Risk: The currency swap deal may expose Nigeria to exchange rate risk, as the value of the yuan may fluctuate against the naira. If the yuan appreciates significantly against the naira, Nigeria may be required to pay more naira to service its debts, which could put pressure on the country’s foreign exchange reserves.
“Risk of Asset Seizure: In the event of default, China may seize Nigerian assets, such as oil and gas fields, ports, or other strategic infrastructure, to recover its debts. This could have significant consequences for Nigeria’s economy and sovereignty, as it could lead to the loss of control over critical sectors and resources.
“Impact on Credit Rating: The currency swap deal may impact Nigeria’s credit rating, as the country’s debt burden and dependence on Chinese funding could be viewed as a credit risk by international rating agencies. A downgrade in Nigeria’s credit rating could make it more expensive for the country to access international capital markets and could limit its ability to borrow from other sources.
“The currency swap deal between Nigeria and China may pose several challenges for Nigeria’s active participation and activities in the Africa Continental Free Trade Area (AfCFTA) implementation. Some of these challenges include: Dependence on Chinese currency; Limited trade with other African countries; Competition for Chinese goods.
“The currency swap deal may not address the tariff and non-tariff barriers that exist between Nigeria and other African countries. The AfCFTA aims to eliminate these barriers, but the currency swap deal may not provide a solution to this challenge.
“Also, the currency swap deal may require Nigeria to adopt payment and settlement systems that are compatible with Chinese systems, which could create challenges for Nigeria’s participation in the AfCFTA. The AfCFTA aims to promote the use of African payment and settlement systems, but the currency swap deal may undermine this objective.
“The currency swap deal may also limit Nigeria’s access to African markets, as the deal may focus primarily on trade with China. The AfCFTA aims to promote access to African markets, but the currency swap deal may undermine this objective.”
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