Nigeria-China Currency Swap’ll Mitigate Forex Risks, Say Analysts

Kunle Aderinokun

The currency swap agreement between the Central Bank of Nigeria and Peoples Bank of China is generating interest among financial and money market analysts, many of who applaud the initiative and highlight its implication for Nigeria’s foreign exchange market and economy at large. Essentially, the analysts believe that with the deal, the risk of devaluation of the naira when the dollar falls would be mitigated.

The CBN had on April 27 signed the bilateral currency swap deal with PBoC in Beijing at a ceremony, where CBN Governor Godwin Emefiele appended his signature for Nigeria’s apex bank and the PBoC Governor, Dr. Yi Gang, signed for the Chinese central bank. The news was broken last Thursday by CBN’s Acting Director, Corporate Communications, Isaac Okorafor, who said Nigeria was the third African country to have such agreement with the PBoC.

The deal, which is coming after two years of negotiations between the two apex banks, is valued at Renminbi (RMB) 16 billion (the equivalent of about $2.5 billion). It 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.

Already, First Bank of Nigeria, Stanbic IBTC Bank, Standard Chartered Bank, and Zenith Bank have been appointed the settlement banks for the currency swap deal. They would be responsible for settling the trade transactions between importers and exporters from both countries.

Emefiele had at the just-concluded IMF-World Bank spring meetings, while responding to concerns that the deal was becoming too long in coming, assured that the plan would not only be consummated soon, but would also be “excellently” executed.

“The agreement has not failed. You must agree with me that transactions of this nature would usually involve very strenuous engagements between the countries and the central banks. I can assure that we are expecting excellent results very soon. I will leave it at that for now and by the time the news comes out, Nigerians would be very happy,” he had explained.

Experts see the deal as a welcome development, saying it would help to lessen the pressure on the exchange rate of the naira to the dollar. Specifically, they point out that the Renmimbi-Naira deal would help mitigate the risk of devaluation whenever the dollar falls.

CEO, Global Analytics Consulting Ltd, Mr. Tope Fasua, said regarding that Renmimbi-Naira swap deal, “It’s been in the works for a while. Many other countries have secured similar deals, which enable them to bypass exchange risks and costs of having to route local currencies through the US Dollar and onwards to the Chinese Currency.”

Fasua added, “In view of the growing trade influence of China, as proven by the fact that almost 20 per cent of our foreign trade is with that country today, this deal makes eminent sense.“

However, he said, “We still have to understand that the traffic is largely one-way. It’s a bit depressing to note that the bulk of oil exports to China will be crude oil and some solid minerals.”

In a similar vein, CEO, The CFG Advisory Ltd, Mr. Adetilewa Adebajo, noted that the deal will “put less pressure on the demand for dollars with the rising trade deficit with China and with the reserve levels where they are. I see no reason why the Naira is not trading between 220-235 to the dollar. Naira appreciation is long overdue against US$.”

Similarly, Director, Union Capital Markets, Egie Akpata, noted that the naira, which has a de facto peg to USD, currently suffers unfair devaluation when the dollar falls. He believed with the deal, this should be avoided.

Akpata also said, “In theory, some demanding USD to convert to Chinese currency will just convert from Naira directly. So some USD demand will vanish.”

He, however, cautioned that the Chinese were not going to keep Naira stable when it is losing against major currencies.

In the same vein, Macroeconomist, FBNQuest Merchant Bank, Chinwe Egwim, said, “Given that a decent volume of imported inputs for manufacturers are sourced from China, this is a good step forward as it should ease transaction processes.”

According to her, “The manufacturing GDP accounts for less than 15 per cent of Nigeria’s total GDP and with this agreement, a boost in manufacturing activities is very likely. Thereby, leading to a broader impact on the economy as a whole.”
“Based on FBNQ PMI data, FX sourcing is a core factor for swings in the headline reading (that is, in addition to power supply ). The indirect impact of this agreement on the basis of the PMI data is a potential boost in output , stocks of purchases and employment,” Egwim also pointed out, adding, however, that, “if soft demand persists it could cripple expected impact.”
Besides, Egwim added that the deal should “encourage export activities from Nigeria to China as Chinese manufacturers would be able to obtain sufficient Naira from banks in China to pay for imported inputs from Nigeria.” “Essentially, creating more opportunities for economic diversification and a broader platform for locally produced goods.”

In announcing the currency swap deal, Okorafor said among other benefits, “It would provide naira liquidity to Chinese businesses and provide RMB liquidity to Nigerian 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.”

He added, “With the operationalisation of this agreement, it will be easier for most Nigerian 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 deal, which is purely an exchange of currencies, will also make it easier for Chinese manufacturers seeking to buy raw materials from Nigeria to obtain enough Naira from banks in China to pay for their imports from Nigeria. Indeed, the deal will protect Nigerian business people from the harsh effects of third currency fluctuations.”

Okorafor said, “Both the Nigerian and Chinese officials expressed delight at the conclusion and signing of the agreement and expressed the hope that it would boost mutually beneficial business transactions between Nigeria and the Peoples Republic of China.”