THUMBS UP: A Step in Right Direction

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Last week’s announcement that the Central Bank of Nigeria (CBN) had signed a $2.5 billion bilateral currency swap with the Peoples Bank of China (PBoC) has been widely described as a step in the right direction.

The transaction valued at 16 billion Renminbi (RMB) 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, said the statement.

Among other benefits, this agreement will 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.

News on the swap came at a time Nigeria’s foreign reserves have inched up to $48 billion on higher oil prices, giving the country leverage in its negotiations with the Chinese central bank.

It is also expected to assist both countries in their foreign exchange reserves management, enhance financial stability and promote broader economic cooperation between the two countries.

“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 scarce foreign currencies,” the CBN explained.

Analysts at Afrinvest Securities Limited viewed the agreement as a positive development, given theforeign currency (FCY) liquidity squeeze Nigeria frequently experiences and the strong trade & investment ties between the two countries.

According to the trade statistics by the National Bureau of Statistics (NBS), merchandise trade between China and Nigeria reached a record high of N2 trillionin 2017 (8.7% of total Merchandise trade), thus making China Nigeria’s third largest trading partner after India and the United States (accounting for 12.5% and 10.8% of merchandise trade respectively).

However, the Balance of Trade is heavily tilted in favour of China; imports from China in 2017 (N1.8trillion) was 8.1 times Nigeria’s export (N220.6 billion) and accounts for 20.9 per cent of total imports in the last five years.

This is clearly shows Nigeria’s growing dependence on China, much like most of the rest of the world, for manufactured products and industrial inputs.

“Given the established strategic importance of China as a major trade partner, the bilateral currency swap agreement will be beneficial to the Nigerian economy in several ways.

“First, it would reduce currency transaction cost for importers and ease forex liquidity pressures in periods of forex rate volatility and/or scarcity.

“The implementation of this currency swap will also enhance financial stability and external reserves management by reducing the volume of forex interventions in the local market needed to fulfil imports demand.

“Lastly, this agreement could serve as a risk management and unconventional monetary policy tool as probable losses resulting from transactions affected by volatility in the local currency could be hedged and minimised,” Afrinvest stated.

The Managing Director, Crane Securities, Mr. Mike Eze, also welcomed the deal

He said: “The deal is in line with the Federal Government’s desire to attract foreign investment. This will boost our economy.

“By the time you study the nitty-gritty of the deal, you will realise that it also favours Nigeria,” he stated.

Overall, the agreement is expected to enable the country manage third currencies pressure and liquidity.