How Nigeria-China currency swap deal will benefit economy
Expectations are high over the $2.5billion bilateral currency swap agreement between the Central Bank of Nigeria and the People’s Bank of China. Ibrahim Apekhade Yusuf in this report looks at the fallout
The official signing ceremony of the currency swap deal between Nigeria and China last weekend proved bookmakers wrong that the proposal which had been in the cooler for over two years was not a ruse after all.
The Asian powerhouse has multiple year currency swap agreements of the Renminbi with Argentina, Belarus, Brazil, Hong Kong, Iceland, Indonesia, Malaysia, Singapore, South Korea, United Kingdom and Uzbekistan. According to the People’s Bank of China (PBoC), those swap agreements were intended not only to “stabilise the international financial market,” but also to “facilitate bilateral trade and investment.”
Nigeria, in any case was the third country in Africa (after South Africa and Egypt) to sign such a deal with China.
The Director- General of the African Affairs Department of China’s Foreign Ministry, Lin Songtian told reporters in Beijing after the agreement was signed by both central bank governors that the Renminbi (yuan) is free to flow among different banks in Nigeria and has been included in the foreign exchange reserves of Nigeria.
What the deal is all about
According to the statement issued by the CBN spokesman, Isaac Okorafor, Godwin Emefiele, the CBN governor, and Yi Gang, the PBoC governor, had entered a three-year currency swap agreement on behalf of Nigeria and China respectively at the official signing ceremony in Beijing, China.
The deal, which is valued at Renminbi (RMB) 16 billion or USD2.5bn had taken two years of negotiation between both governments.
The deal which will be in force for three years can be extended by mutual consent.
The agreement is expected to bring more flexibility into both markets by easing up the challenges encountered in the search for third currencies and “providing adequate local currency liquidity to Nigerian and China industrialists,’’ the statement read.
The CBN spokesman added that the ‘’agreement will provide Naira liquidity to Chinese businesses and provide RMB liquidity to Nigeria businesses respectively, thereby improving the speed, convenience and volume of transactions between the two countries.
‘’It will also assist both countries in their foreign exchange reserves management, enhance financial stability and promote broader economic cooperation between the two countries.’’
According to Okorafor, Nigerian manufacturers, particularly Small and Medium Enterprises (SMEs), manufacturers and cottage industries, who import raw materials, spare-parts and simple machinery, will have access to the RMB liquidity from Nigerian banks without being exposed to the difficulties of seeking other scarce foreign currencies.
Checks by The Nation revealed that ahead of the currency swap deal,the CBN had since diversified its FX reserves away from the dollar by switching into Yuan, which currently represents approximately a tenth of its total reserves.
Flipside of the swap deal
It is however instructive to note that the currency-swap was calculated at the Nigerian central bank’s interbank rate of NGN305:USD1, rather than the Nigerian Foreign Exchange Fixings (NIFEX) rate of NGN338.7:USD1. This implies that chances of seeing any unification between Nigerian exchange rates anytime soon is unlikely.
Excitements over currency swap deal
The Chairman, Mobile Software Solution, Chris Uwaje, believes that the naira to yuan swap agreement should reduce the pressure on the naira if properly implemented.
According to Uwaje, “Nigerian businesses don’t need to use dollar to pay anymore because it’s going to be costlier, we pay with yuan. By so doing we avoid every form of round tripping.”
He also urged Buhari’s economic team to see how the country can indeed leverage on the technology prowess of China for Nigeria to attain a sustainable economy.
In the assertion of Gbade Buraimoh, a Lagos-based financial expert, the quest for dollar through banks will definitely reduce, as all transactions between Nigeria and China will be in yuan instead of dollar.
He observed that oil sales from Nigeria to China would be settled in Chinese currency, stressing that access to yuan would also be easier.
“The swap will eliminate challenges arising from transactions with the dollar and promote business flexibility between Nigerian and Chinese,’’ Buraimoh explained.
An Abuja-based international affairs and diplomacy expert, Kadiri Abdulrahman, viewed the currency swap deal as a positive move towards enhancing the value of the naira, thereby improving access to cheaper foreign exchange, in favour of members of the business community
In the opinion of the Ecobank Group Research, the currency swap deal is a good one.
In a statement released by the Bank’s research team,they noted amongst other things that the deal aims to facilitate bilateral trade and investment as well as promote financial stability and broader economic cooperation between the two countries.
It’s also the team’s opinion that it will help the country to position itself as a trading hub with China in the West African sub-region.
Specifically, they noted that this agreement will provide NGN liquidity to Chinese firms looking to do business with Nigeria and provide RMB liquidity to Nigerian firms looking to do business with China, helping achieving effectiveness and efficiency in trade transactions between the two countries, without being exposed to the challenge of seeking another foreign currency.
“In terms of the impact and implication, we believe that pressure on Nigerian importers who need US dollars to import goods from China is likely to dissipate as well as improve CBN’s management of the country’s FX reserves.”
While commenting on the nation’s FX reserves which they acknowledged had improved over the past year and stands at USD47.0bn (as of April 2018) from USD30.9bn a year ago, the Ecobank stated matter-of-factly that it was made possible in part by the improved oil receipts alongside significant FPI inflows via the Investor and Exporter (I&E) window introduced in April 2017.
In addition, this agreement (in addition to ongoing import ban on selected items) is likely to reduce further the strong demand for the USD and support the NGN.
With improved trading activity, stronger FX reserves and continued CBN support, the official exchange rate has been static at NGN360:USD1. In light of this new currency swap, we expect a strengthening bias on the NGN in the near term as this agreement is likely to improve FX liquidity and lead to higher flows from China.
While urging caution, the Ecobank analysts said, “By year end, our expectations of lower oil prices and increased FPI exits from NGN assets ahead of the 2019 elections, are likely to offset some of the gains, resulting in softer NGN and bearish activity in the bonds market.”
This is just it said, the CBN is likely to retain its exchange rate at NGN305-306:USD1 and maintain interventions in the Secondary Market Intervention Sales (SMIS) windows at the NIFEX exchange rate of NGN327-340:USD1.
Stakeholders urge cautious optimism over currency swap deal
Expected stakeholders have urged Nigeria to tread with caution as far as the currency swap deal with China is concerned.
The Director-General of Lagos Chamber of Commerce and Industry, Muda Yusuf agreed that the swap deal would smoothen the payment system in the bilateral trade between the two countries but stressed that it might not really strengthen the naira in the foreign exchange market, as the nation would have to enhance its productive base to achieve that.
Mr Boniface Okezie, the president Progressive Shareholders Association of Nigeria, told newsmen that the currency swap deal was unnecessary. He said the deal would ensure that majority of the country’s foreign trade deals were channelled to the Chinese economy.
“This will lead to economic dependence despite that Nigeria is a sovereign nation. The policy will lead to the influx of Chinese goods into our country considering that we are contending with weak regulation,” he said.
In the view of Dr Austin Nweze, a lecturer in the department of Economics, Pan Atlantic University, Ibeju-Lekki, Lagos, the deal was only good on its surface value.
He noted that in the long run, the initiative would allow the Chinese to compete with our local businesses, thereby, impeding the growth of indigenous firms.
According to the political economist, the only benefit of the currency swap deal for Nigeria was that in the short run, it would address third party sourcing of the Chinese currency by Nigerian importers.
“However, it will take the trade deals with the Chinese to a new height and reduce the pressures of our foreign exchange,” he said.
Echoing similar sentiments, Ken Ukaoha, President General, National Association of Nigerian Traders (NANTS), an umbrella organisation for businesses trading across continents of the globe from Middle East, Asia, etc, acknowledged the fact that the currency swap has some of its downsides.
Speaking in an interview with The Nation, he expressed that things might go awry unless the government is alive to its responsibility.
“Certainly, as far as we’re concerned, it is our view that the federal government should sound a note of caution as well as beam its searchlight on the activities of the regulatory agencies such as the Standards Organisation of Nigeria (SON), NAFDAC, Consumer Protection Council, the Nigeria Export Promotion Council, the Customs, Federal Ministry of Trade and Investment to ensure that they collaborate with the Central Bank of Nigeria so that the policy will not bring about any negative effects to Nigeria.”
Expatiating, he said: “This policy can trigger high volumes of import into this country which is good. But of course, it can also trigger unrestricted imports, especially the influx of substandard goods into the country. Therefore what should be done is that the regulatory agencies should mount serious surveillance to ensure that influx of substandard goods does not take over our domestic market.
“More importantly, our local industries must not surrender or succumb to the whims and caprices of importation. That is to say we’re not going to slaughter our local industries on the altar of unrestricted importation from China courtesy of the currency swap.
“The agencies, including the Nigeria Customs Service, I must reiterate, must rise to ensure the standardisation of products coming into this country. We must not just allow all manner of imported goods into the country all the name of the currency swap deal between China and Nigeria.”
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