There are indications that the naira may begin to gain strength in the days to come as Nigerian banks conclude plans to open shops in China.
This followed the pact signed by both the Central Bank of Nigeria (CBN) and the People’s Bank of China (PBOC) on a RMB15 billion (about N720 billion) currency swap.
With the swap, some banks with international licence but without presence in China have begun processes to open shop in the Asian giant.
LEADERSHIP findings reveal that some tier one banks with presence in Europe and other African countries have applied to the CBN to obtain approval to open shop in China.
An insider in one of the top tier banks confirmed to our correspondent that talks are already ongoing in the bank on opening shop in China, even as the bank would soon be seeking regulatory approval.
But tier 2 banks are wary of spreading their tentacles so as not to incur more operational costs that would eat into their profits.
A source in one of the tier 2 banks with international licence told LEADERSHIP that the bank management is being cautious of spreading too fast and would rather stick to its growth plan.
According to the source, the management is working towards achieving a tier one status before expanding outside the country.
Analysts believe that the swap will cut back the demand for dollar, as Nigerian businesses require more Chinese currency, though the value of the naira weakened slightly at the Investors and Exporters’ Window last week and remained stable at the parallel market.
According to lead analyst at FXTM, Lukman Otunuga, there is a possibility that the naira will strengthen from the currency swap deal, as the demand for Dollar drops.
He noted that the swap deal will not only improve the speed, but also the convenience of transactions between both nations.
Otunuga said investor’s sentiment towards the Nigerian economy is being elevated, after the CBN “finally signed a bilateral currency swap agreement with China”, a pact that aims to provide sufficient liquidity to Nigerian and Chinese industrialists.
Similarly, analysts at Afrinvest West Africa described the agreement between the two countries as a positive development, given the foreign currency liquidity squeeze Nigeria frequently experiences and the strong trade and investment ties between the two countries.
According to figures provided by the National Bureau of Statistics (NBS), merchandise trade between China and Nigeria reached a record high of N2 trillion in 2017 representing 8.7 per cent of total merchandise trade in the country.
This makes China Nigeria’s third largest trading partner after India and the United States accounting for 12.5 per cent and 10.8 per cent of merchandise trade respectively.
However, the Balance of Trade is heavily tilted in favour of China as imports of N1.8 trillion from the Asian giant in 2017 was 8.1 times Nigeria’s export of N220.6 billion and accounts for 20.9 per cent of total imports in the last five years.
Analysts at Afrinvest noted that the swap pact would reduce currency transaction cost for importers and ease forex liquidity pressures in periods of exchange rate volatility and 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 fulfill imports demand”, they noted.
The analysts also said the 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 minimized.
“As an unconventional monetary policy tool, in managing third currencies pressures and liquidity, the importance of the bilateral currency swap agreement between Nigeria and China cannot be neglected”, they added.
However at RMB15 billion, analysts say the Swap Line, which could barely cover 40 per cent of Nigeria’s Chinese import in a single year, will limit the impact on the economy.
They listed as a key downside risk to the agreement, the ease of transaction with a highly competitive country like China, saying it could worsen Nigeria’s trade balance and weaken domestic manufacturing capacity.
“We think this concern is justified, particularly in a period of heightened trade skepticism. Yet it also emphasises the need to deepen domestic policies on improving competitiveness”, the Afrinvest analysts stated in an emailed note.