by: Lekan Sote
The Bilateral Currency Swap Agreement that President Muhammadu Buhari brought back from his China trip confirmed what everyone already knew: Nigeria is the hub of West Africa’s economy. And pitting the Chinese dragon against Uncle Sam delighted those who always wanted China to give a bloody nose to America that led other nations to end China’s Boxer Revolution at the close of the 19th century.
Nigeria’s main source of the dollar is through the sale of crude oil. The recent plunge in the sale and price of the commodity in the international market led to a dearth in the dollar available to government and importers, and an adverse foreign exchange rate regime.
Both compromised the importation of petroleum products, and caused the triple jeopardy of fuel scarcity, black market racketeering, and long queues at petrol stations. But the Minister of State for Petroleum Resources, Ibe Kachikwu, got a short term handle on solving the importation problem. He convinced International Oil Companies to sell dollar to Nigerian importers of petroleum products.
This probably works also to the benefit of the International Monetary Fund that is concerned that Africa’s biggest economy may no longer buy consumer goods from its client states of the Organisation for Economic Cooperation and Development. On its undisguised quest to get the naira devalued, the IMF mounted pressure on President Muhammadu Buhari and the Governor of Central Bank of Nigeria, Godwin Emefiele, a deux.
Both President and the CBN Governor, still working with the economic assumptions of North America and Western Europe, took a middle road to devaluing the naira by fiat. They watched helplessly as the naira painfully depreciated at the parallel market. The yuan- naira swap deal should temporarily stem the slide, though the likes of Ike Chioke, Group Managing Director of Afrinvest West Africa, forecast further devaluation of the naira.
The swap allows Nigeria and China to warehouse each other’s currency ahead of export, much like the chips you get before you start playing at the casino gaming table. As you import, you deplete your inventory of the other country’s currency. The yuan recently got grudging approval from the IMF as a convertible currency, ranking after the dollar and euro, but ahead of the sterling, deutsche mark, and yen.
A thumb down for the swap comes from the suspicion of Investment Advisor, Bismack Rewane, that China will likely resell the crude oil it buys with the yuan from Nigeria, to earn the dollar that would have accrued to Nigeria. Think of the cheeky title of the song, “I have danced with the man who has danced with the girl who has danced with the Prince of Wales.”
That China has the world’s largest foreign reserves in dollars suggests that the finance of the world’s second biggest economy has great affinity with the American economy. This implies that China will prefer a dollar that is stronger than its yuan, so that Nigerians, Americans, and the rest of the world can import more of its manufactures. A reading of the tea leaves prophesy that the yuan swap will further strengthen the dollar, to the advantage of China.
America successfully hoodwinked everyone to think that the more dollars a country had, the stronger its currency, or something like that. The ploy actually guarantees that these unfortunate client countries have enough dollars to finance their imports from the West.
Practically every major international business is denominated and settled in dollars. The international trade in crude oil, arguably the biggest business in the world – by value-is traded in dollars. This fact, and America’s dominance in the oil exploration technology effectively places the upstream, downstream, and whatever is in-between, of the oil trade, down pat in the hands of America.
In the oil boom days, Nigeria’s currency was about at par with the dollar, before gaining on it, to trade at 46 kobo to the dollar in the early 1980s. This was probably due to a deliberate act of America’s central bank, the Federal Reserve, to encourage profligate import of American consumer goods by a nation of gluttons with too much money to spend.
Things got to a head, and the naira got so battered that a series of rescue plans, from import licence, import restriction, rationing of the dollar, and stringent anti-currency trafficking laws, was introduced to manage the deteriorating currency exchange regime. Musician Fela Anikulapo-Kuti was jailed for allegedly violating the foreign exchange law.
In the end, the government of military dictator Ibrahim Babangida introduced the Second-Tier Foreign Exchange Market that commenced the deliberate depreciation, by fiat, of the naira against the dollar. This bitter pill ushered in the debilitating Structural Adjustment Programme that was inspired by the evil-eyed IMF.
The road to the descent started at N4 to one dollar. Now, it oscillates between N199 at the official CBN window and anywhere north of N300. It was nearly N400 at a time, which gladdened the heart of the IMF in no small measure. It is only fair to admit that President Buhari inherited this problem with a CBN Governor who thinks forex scarcity is good (sic) for Nigeria.
America’s preeminence immediately after the Second World War gave her the audacity to substitute the International Gold Standard with the dollar that was dubbed a convertible currency. This effectively placed Western investment firms that warehouse the foreign reserves of nations in the driving seat of the world’s economy. Their alumni often consult for the World Bank, IMF, and maybe America’s Central Intelligence Agency.
Some economic history should explain the convertible currency. In “A Textbook of Economics,” published soon after the coronation of Queen Elizabeth II in 1953, economist J.L. Hanson records that paper money had its origin in the receipts given by goldsmiths to clients who kept money and other valuables with them.
Hanson avoided vexing the newly coroneted Queen by claiming that acts of violence by unknown persons, rather than the rogue King Charles 1 who seized gold stored by merchants in the Royal Mint in 1640, caused the stampede of valuables to the vaults of goldsmiths – for a fee. The goldsmiths issued certificates to confirm the purity and quantity of gold in their possession.
If a client deposited 50 pounds in gold or silver coins, he would receive a receipt for that sum. When he purchased a good from a vendor, he could both return the note to the goldsmith, and retrieve his coins to pay the vendor, or simply pass the goldsmith’s note to the vendor. Over time, central banks assumed the responsibility of issuing the currency notes, while banks issued cheques.
With central banks came the International Gold Standard that allowed the currency to be freely converted into gold and vice versa. The exchange rate was determined by the economic difference for an ounce of gold between two currencies. Gold was preferred because it was rare, durable, divisible, and easily identifiable.
The replacement of the Gold Standard with the dollar locks a substantial portion of international trade to the economy of America, and its West European kinsmen. If you agree with those who insist that there is a high possibility for the American economy to profit, however vicariously, from every dollar transaction, you should understand China’s yuan swap game plan.
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