By Obinna Chima
Since the inclusion of the Chinese currencyÂ among basket of reserve currencies that have special drawing rights (SDR), by theÂ International Monetary Fund (IMF), the government of China has continued to see it as a reflection of the importance of its currency in theÂ world’s trading and financial systems.
The countryâ€™sÂ expanding role in global trade and the substantial increase in the international use and trading of the RenminbiÂ (RMB) has seen it increasingly enter into currency swap agreements with a lot of countries.
Some of theÂ countriesÂ includeÂ 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,Â with the dealÂ totalling over RMB3.137 trillion.Â And last week, it finalised its currency swap agreement with Nigeria, valued at $2.5 billion.
CentralÂ Bank ofÂ Nigeriaâ€™s (CBN)Â spokesman, Mr. Isaac Okorafor,Â who announced this, said the CBN Governor, Mr. Godwin Emefiele, led CBN officials while PBoC Governor, Dr. Yi Gang, led the Chinese team at the official signing ceremony.Â He said the deal was sealedÂ the precedingÂ Friday after over two years of painstaking negotiations by both central banks.
According to the CBN, the transaction, which was valued atÂ 16 billionÂ RMB, was 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.
The CBN saidÂ among other benefits, the agreement is expected to 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.
â€œIt will also assist both countries in their foreign exchange reserves management, enhance financial stability and promote broader economic cooperation between the two countries.
â€œWith 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 scarce foreign currencies.
â€œThe 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.
â€œIndeed, the deal will protect Nigerian business people from the harsh effects of third currency fluctuations.
â€œWith this, Nigeria becomes the third African country to have such an agreement in place with the PBoC,â€ it explained.
THISDAY exclusively reported thatÂ First Bank of Nigeria Limited, Stanbic IBTC, Standard Chartered Bank (SCB) and Zenith Bank Plc hadÂ been appointed the settlement banks for the bilateral currency swap agreement.
With their appointment, the four banks willÂ be responsible for settling the trade transactions between importers and exporters from both countries, likely to take off just before next month.
The reason the four financial institutions were chosen was because StanChart and Stanbic already have operational offices in China, while Zenith and FirstBank have representative offices in Beijing.
However, whereas StanChart and Stanbic can start operations immediately as settlement banks, Zenith and FirstBank will be required to upgrade their representative offices to full operations in China.
While SCB already has a presence in China through its Standard Chartered Bank (China) Limited, Stanbic has been trading in the country through its affiliate, the Investment and Commercial Bank China (ICBC).However, FBN and Zenith Bank were also appointed because they already have representative offices in China.
So, while SCB and Stanbic can start immediately, it would take FBN and Zenith Bank some time to join the settlement arrangement because they would have to convert their representative offices to operational offices.
The settlement banks are expected to handle the trade obligations that would enable an importer in Nigeria, after filling the required documentation, to easily exchange the naira for the Renminbi (RMB) instead of resorting to third currencies such as the U.S. dollar, while the reverse will be the case for importers in China that trade with Nigerian businesses.
Commenting on the bi-lateral agreement, Research Analyst at FXTM,Â Lukman Otunuga,Â pointed out that sentiment towards the Nigerian economy was elevated after the nation finally signedÂ the agreement with China.
According to him, the move will not only improve the speed, but also the convenience of transactions between both nations.
â€œThere is a possibility that theÂ naira will strengthen from the currency swap deal, as the demand forÂ dollar drops,â€ he said.
To analysts at Cowry Assets Management Limited, theÂ currency swap dealÂ wouldfacilitate trade between the two countries, by providing adequate local currency liquidity to Nigerian and Chinese industrialists and other businesses, thereby sidestepping a third currencyÂ -the US dollar.
â€œWe expect the arrangement to ease pressure on the limited dollar supply at the Investorsâ€™Â & Exportersâ€™ forex window (I&E)and hence, enhance stability of thenaira/dollarÂ exchange rate,â€ the firm added.
But theÂ Head, Global Research, Standard Chartered Bank,Â Razia Khan, said sheÂ doesÂ not expect theÂ bilateral agreementÂ to have any immediate impact onÂ Nigeriaâ€™s forexÂ reserves.
â€œEven if the swap were to be drawn on in the future, it would likely show up as a liability on the CBNâ€™s balance sheet. However, the swap is still significant in that it provides greater international liquidity to the CBN, reducing the need for the CBN to hold an especially high level of precautionary USD FX reserves.
â€œGiven the rebound in oil earnings, Nigeriaâ€™s reserves are at an increasingly comfortable level. Â With the swap arrangement in place, it will however be possible for the CBN to draw on this in order to provide the CNY liquidity needed to support Nigerian import demand from China, without having to convert that to USÂ dollar demand first.
â€œSo, in all, this should support expectations ofÂ forexÂ stability in Nigeria, even as importer demand recovers. Â It is a small positive, which is reinforced by the greater positive of risingÂ forexreserves because of the rebound in oil prices and exports,â€ Khan said.
Also, theÂ Director General of the Lagos Chamber of Commerce and Industry (LCCI), Mr. Muda Yusuf, said the deal would positively impact trade and investments between Nigeria and China.
â€œIt will impact on trade positively between Nigeria and China, because it would make the payment system easier. However, it can only last if the exchange rate remains stable. This is because if there are issues with the exchange rate, it may affect it,â€ he added.
CBN Governor, Mr. GodwinÂ Emefiele had explained that Nigeria was not the only country that had agreed to a currency swap with China, as several other countries â€“ developed and emerging markets â€“ with growing trade volumes with China had entered into similar currency swaps with the Asian country.
Â â€œThe agreement on the currency swap with China will definitely benefit Nigeria because the essence of the mandate is to ensure that Nigeria is designated as the trading hub with China in the West African sub-region for people who want the Renminbi as a currency denomination.
â€œAlso for us, we believe that using the renminbi will improve trade with China, as this will encourage importers to open L/Cs in the Chinese currency for the importation of raw materials, equipment and machinery from China, rather than other trading regions, so the agreement will encourage trade between both countries,â€Â he had explained.
This arrangement is also expected tocontribute towardsÂ stabilising the countryâ€™s balance of payments (BoP) position.