Analysts harp on $2.5bn Nigeria-China currency swap

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By Kayode Tokede

The Central Bank of Nigeria (CBN) during the week announced signing a $2.5 billion currency swap agreement with Peoples Bank of China (PBoC).

The transaction which is valued at Renminbi (RMB) 16 billion, or the equivalent of about $2.5billion, is aimed at providing adequate local currency liquidity and Chinese industrialists.

Currency swaps are regarded as agreements to exchange cash flow between two parties usually referred to as counter parties. It is expected that counter parties to the agreement are to exchange an amount of funds at regular interval, until the swap expires.

The apex bank explained that the currency swap is aimed at providing adequate local currency liquidity to Nigerian and Chinese industrialists and other businesses thereby reducing the difficulties encountered in the search for third currencies.

With the operationalisation of this agreement, it will be easier for most local manufacturers, especially small and medium enterprises (SMEs) and cottage industries in manufacturing and export businesses to import raw materials, spare-parts and simple machinery to undertake their businesses by taking advantage of available RMB liquidity from Nigerian banks without being exposed to the difficulties of seeking other scare foreign currencies.

The National Bureau of Statistics (NBS) in its foreign trade in goods Statistics report disclosed that total values of   imported goods from China to Nigeria Gross domestic product (GDP) stand at 6.8 per cent to GDP in fourth quarter of 2017.

The report stated that Nigeria is the largest import partners in fourth quarter of 2017 where China, Belgium, United States, India, and the Netherlands, which respectively accounted for N465.13 billion (22 per cent), N191.05 billion (nine per cent), N189.4 billion or (8.9 per cent), N135.4 billion (6.4 per cent), and N 125.2 billion (5.9per cent).

Presently, the total values of   imported goods from China to Nigeria GDP stand at 1.58 per cent.

The report by NBS stated that Imports of manufactured goods were 0.3per cent lower than the value recorded in the previous quarter, and 10per cent higher than the values recorded in the same period last year.

“Manufactured goods imports in Q4 2017 was dominated by imports of Used vehicles from the United States (N31.3 billion); Imported motorcycles and cycles from India (N21.6 billion), China (N10.4 billion); Connectors for optical fibres from the United Kingdom (N22.0 billion), France (0.29 billion), and United States (0.177).

Other manufactured goods products imported during the period under review Q4 2017 are Milk & cream in powder from New Zealand (N6.3 billion), and Machines for the reception & transmission of voice etc., mainly from China (N11.5 billion), and Sweden (N6.5 billion),” the report by NBS stated.

The Governor, CBN, Mr. Godwin Emefiele had explained that Nigeria was not the only country that had agreed to a currency swap with China, as several other countries – developed and emerging markets – with growing trade volumes with China had entered into similar currency swaps with the Asian country.

The countries are the United Kingdom, Belarus, Malaysia, South Africa, Australia, Armenia, Surinam, Hong Kong, Pakistan, Thailand, Kazakhstan, South Korea, Canada, Qatar, Russia, the European Union, Sri Lanka, Mongolia, New Zealand, Argentina, Switzerland, Iceland, Albania, Hungary, Brazil, Singapore, Turkey, Ukraine, Indonesia, Uzbekistan, and the United Arab Emirates, totalling over RMB3.137 trillion.

 

Stakeholders’ reaction on $2.5 billion cur-rency swap

Speaking with Nigerian NewsDirect during the weekend, Associate Professor and Head, Banking & Finance department Nasarawa State University, Mr. Uche Uwaleke, said the currency swap, “will improve Nigerian economy.

“When we talk about our reserves today, it is composed of Dollar. It means that we are over dependent on one currency and something happened, then our reserves in danger.

“The currency swap will diversify foreign exchange management by CBN. it is going to boost foreign reserves, appreciate the Naira because the pressure on Dollar will reduce.”

He said the currency swap in short-mid term will impact positively on the nation’s economy.

“The swap is going to last for two years but renewable,” he said.

He explained further that with the agreement, Chinese investors might be compelled by federal government to come and establish manufacturing companies in Nigeria.

He said, “If that happened, it is going to create jobs and increased production. I see more of Chinese companies producing in Nigeria and that again is expected to grow our GDP. By the time we fix power, road and security that will encourage Chinese investors to invest in Nigerian economy. For the two countries, it is a win-win situation.”

The Director General of the Lagos Chamber of Commerce and Industry (LCCI), Mr. Muda Yusuf, said the deal would positively impact on trade and investments between Nigeria and China.

He said, “The deal will ease trade for those brining finished goods into the country. it will make trading between Nigeria and China easier since there will be no need to use Dollar as foreign exchange.”

Commenting on increased import on China, he said import policy would guide good import and government agencies must be protecting local manufactural goods.

According to him, “We have policy for the manufactural sector. Some of these products are under high tariff. The import policies are always there to protect the interest of local manufactured goods. It is for agents of government to enforce those policies and do their work properly because that has always been the major issue.

“We should be worried about import deficiencies from China,” he explained in a phone interview with Nigerian NewsDirect.

The Managing Director,, Enterprise Stockbrokers Plc, Rotimi Fakayejo, said the currency swap would reduce pressure on foreign reserves and improve liquidity.

According to him, import competition between China and USA might increase significantly, stressing that Nigeria does not have a stable foreign policy.

He said, “it is going to be competition between USA and China. We do not have a stable foreign policy. We buy military equipment from Russia today, the next day, we buy from USA.”

He was quick to add that the currency swap tends to improve stability in the foreign exchange market.

He added the “the only way it can enhance employment is when local manufacturers are importing machines from China not finished goods.”

 

4 Banks to act as clearing houses

Meanwhile, indications have emerged that in order for the deal between Nigeria and China on currency swap become operationalized more banks in Nigeria would have access it, as  only four Nigerian based banks have offices in China which is a requirement for them to act as clearing houses.

According to a source, only Stanbic, Standard Chartered, Zenith Bank and First Bank are acting clearing houses for the deal because for any bank to access its clearing house, it must have a balance sheet of at least $20 billion.

It would be noted that Stanbic IBTC plc and Standard Chartered, by virtue of being international banks, comfortably clear this hurdle, while Zenith and First Bank just fall short.

The source stressed that the CBN would like more than two banks to have access so it is not yet clear how this circle will be squared.

“One option will be for the CBN itself to act as a clearing bank but it does not appear to want to go down this route”, he added.

He further mentioned that both central banks have publicized the deals in order to convince Nigerian businesses to pay their Chinese counterparts in Renminbi and for the Chinese to accept it as opposed to the dollar.

 

 

 

 

 

 

 

 

 

 

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