The $2.5 billion bilateral currency swap deal between Nigeria and China is likely to reduce further the strong demand for the United States dollar and support the naira, analysts at Ecobank Capital have said.
The Central Bank of Nigeria early this month signed the deal with the People’s Bank of China, making Nigeria, the third country in Africa (after South Africa and Egypt) to sign such a deal with China.
The agreement will allow the two countries to swap a total of 15 billion Renminbi (which may also be used for the yuan) for ₦720 billion, or vice versa, in the next three years. The deal can be extended by mutual consent.
The currency swap was calculated at the CBN’s interbank rate of ₦305:$1, rather than the Nigerian Foreign Exchange Fixings rate of ₦338.7:$1.
“This implies that we are unlikely to see any unification between Nigerian exchange rates anytime soon,” the analysts said in a note.
The deal aims to facilitate bilateral trade and investment, and to promote financial stability and broader economic cooperation between the two countries.
The analysts said it would also help the Nigeria to position itself as a trading hub with China in the West African sub-region.
They noted that the agreement would provide naira liquidity to Chinese firms looking to do business with Nigeria and provide the RMB liquidity to Nigerian firms looking to do business with China.
This, according to the analysts, would help in 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, we believe that pressure on Nigerian importers who need the US dollars to import goods from China is likely to dissipate, improving the CBN’s management of the country’s foreign exchange reserves,” they said.
Nigeria’s forex reserves have improved over the past year and stood at $47 billion as of April 2018 from $30.9 billion a year ago, reflecting improved oil receipts alongside significant foreign portfolio investment flows via the Investor and Exporter window introduced in April 2017.
The CBN has also diversified its forex reserves away from the dollar by switching into yuan, which currently represents approximately a tenth of its total reserves, according to the analysts.
They noted that with improved trading activity, stronger forex reserves and continued CBN support, the official exchange rate had been static at ₦360:$1.
“In the light of this new currency swap, we expect a strengthening bias on the naira in the near term as this agreement is likely to improve forex liquidity and lead to higher flows from China.”
According to Ecobank, the CBN is likely to retain its exchange rate at ₦305-306:$1 and maintain interventions in the Secondary Market Intervention Sales windows at the NIFEX exchange rate of ₦327-340:$1.
“By year end, our expectations of lower oil prices and increased FPI exits from naira assets ahead of the 2019 elections are likely to offset some of the gains, resulting in softer naira and bearish activity in the bonds market,” the analysts added.