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CBN, China N720bn Currency Swap: What Benefit For Nigerian Economy?



Godwin Emefiele and Dr. Yi Gang

Beyond fostering bilateral trade and direct investment between the two countries, MARK ITSIBOR reports that the move by the Nigerian government to boost trade with China will also make trade between them less reliant on the US dollar

 For a country that is highly import dependent, finding cheaper or favorable channels to aid bilateral trade with her trading partners, ordinarily, should be the basis point for beginning a business charter. In foreign policy formulation, first on the table is national interest – how does it benefit my country? Bilateral trade is a very important mechanism to boost economic relationship.

Over the years, that has not been on the front page in Nigeria’s policy or business negotiations with external countries, resulting in huge trade deficit against the Africa’s largest economy. And that explains why the nation’s huge human and natural resources are cheap for foreign industrialists to exploit and repatriate back home for development of their economies, while the Nigerian economy suffers. But there is a new move to right the wrongs between Nigeria and one of her major trade partner, China.

After over two years of negotiations between the Central Bank of Nigeria (CBN) and the Peoples Bank of China (PBoC), there was an official signing of agreements to enter into a currency swap deal on April 27, 2018 for both countries. Governor of the CBN, Mr. Godwin Emefiele, led CBN officials while PBoC Governor, Dr. Yi Gang, led the Chinese team at the official signing ceremony in Beijing, China. A statement from the CBN said apart from ensuring currency liquidity to Nigerian and Chinese industrialists and other businesses, the signing is also expected to reduce the difficulties often encountered in the search for third currencies.

It must have been one of the best steps taken under this administration. 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,” the Nigerian central bank said in a statement. The deal is designed to assist both countries in their foreign exchange reserves management, enhance financial stability and promote broader economic cooperation between the two countries.

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. Nigeria is the third African country to have such an agreement in place with China; coming after South Africa and Ethiopia.

In the eyes of both local and foreign media, the signing of a new currency swap deal between Nigeria and China, amounting to nearly $2.4 billion orN720bn, equivalent of Renminbi (RMB) 16 billion is on one hand, a move to boost trade with China and on the other hand, help to facilitate bilateral trade and direct investment between both countries, and safeguarding financial market stability in both countries.

The three-year deal will make trade between the two countries less reliant on the United States dollar, there strengthening the Naira against the U.S dollar.  The deal would be extended by mutual consent. That is seen as a warranted gravitation towards China.

Obviously, Nigeria is seeking to improve its heavily deficit trade relations with China who is also looking to expand its foothold in the Africa’s largest economy. Besides its political strength in the African region, Nigeria’s over 198 million estimated population is its big asset, which industrial nations like China see as a big market that needs to be highly explored to achieve its aim of becoming world’s largest economy.

After the US, China is Nigeria’s top trading partner across the world. Deputy Chinese Ambassador to Nigeria, Lin Jing said earlier this year that China’s bilateral trade with Nigeria in 2017 stood at $12.3 billion. He announced that the trade figure recorded was from January to November 2017 alone. The figure also represented a 30 per cent increase, compared to the same period of 2016. “We believe that by maintaining our normal trade volume, our overall economic relation and cooperation will be boosted and give impetus to our overall relationship,” Jing said. Nigeria and China established formal diplomatic relations in February 1971.

Clearly, there is huge trade deficit between Nigeria and the People’s Republic of China. According to a report by the Observatory of Economic Complexity (OEC), China’s imports from Nigeria include mostly gas, oil and rough wood, and amounted to $953 million in 2016. Figures from the National Bureau of Statistics (NBS) indicate that between 2013 and 2016 alone, Nigeria has recorded a trade deficit of over N6 trillion with China. Available statistics have also revealed that out of Nigeria’s total import bill of N29 trillion between 2013 and 2016, China alone accounted for N6.41 trillion.

But as it is often said, the road to perdition is usually paved with good intentions. And the cost of its downside is often unbearable. No matter how potentially beneficial the new deal may seem for the business class in both countries, from all experiences, currency swap is designed to favour a producing country like China more than a consuming Nigeria, for instance. The truth is that it works better for countries with balance of trade. This raises the question of who really benefits from this love folly? Beyond raw materials like crude oil and woods that are cheaply sourced from Nigeria for later export to her, how much of Nigeria’s finished products are consumed in China? By this, many believe that the Nigerian authorities must mind the downside of her handshake with China.

Unlike Nigeria, which merely states that it wants to be in the league of the first global 20 economies by the year 2020, China is boosting innovation in overseas investments and Belt and Road cooperation among its efforts to become a strong trading power by 2050.

The country seeks to extend the reach of its regional and global influence. “We aim to stabilise our position as a big trading nation by 2020, transform into a strong trading country by 2035 and finally become an economic and trade giant by 2050,” said Commerce Minister Zhong Shan recently, referring to China’s status as the world’s No. 2 economy and a major trading partner to most nations.

However, Nigeria is borrowing a leave from Ethiopia whose impressive economic growth in recent times has caught the attention of global investors. The country has experienced fast economic growth in the last decade, averaging around 10 per cent a year. The currency swap between China and the African country is seen as a major contributor to the growth. Experts point to Ethiopia’s manufacturing industry as a key element in the country’s success. Chinese investors have a major stake in the country’s manufacturing sector.

Like a honeycomb that attracts both ants and flies of various species, the currency swap agreement has elicited mixed reactions across board. Why some see it as a move that will bring Nigeria and China on a platform of mutually beneficial trading platform, others believe it may not give strength to the nation’s local currency, after all.

For example, President of the Association of Bureaux De Change Operators of Nigeria (ABCON), Alhaji Aminu Gwadabe sees the move as apt and excellent. For him, “It is a prelude to make the Naira sovereign in the West African economies.”  Gwadabe strongly believe that the currency swap deal will deepen foreign investors’ confidence in the Nigerian economy and reduce pressure in the demand for dollars in the market and provide currency options for imports. Beyond that strength of the new partnership, the currency dealer who admonished the CBN to mandate all money deposit banks to open Yuan domiciliary accounts to make it more accessible to international traders, said the development will aid the diversification of Nigeria’s foreign reserves to make it the clearing house in Africa for Yuan transactions.

CEO of Economic Associates, Ayo Teriba shares that optimism. He believes that any arrangement that Nigeria can make to ease access to foreign exchange is positive for the country. He is convinced that deal will make a remarkable difference for Nigeria.

But Teriba would not believe in entirety alongside those who think it is “Uhuru” for the Nigerian business class. As a matter of fact, the economic analyst does not think the relationship with China is the right way for Nigeria to grow. “Nigeria should be encouraging businesses to invest in Nigeria,” Teriba called, noting that “The relationship between Nigeria and China is already lopsided.”

He is not alone. The position of Ecobank Group Research is that the move will likely not make impact in the foreign exchange segment of the money market. The currency-swap was calculated at the Nigerian central bank’s interbank rate of NGN305:USD1, rather than the Nigerian Foreign Exchange Fixings (NIFEX) rate of NGN338.7:USD1. “This implies that we are unlikely to see any unification between Nigerian exchange rates anytime soon,” the Group said in the report that was published on May 7. Part of the aims for signing the currency deal is to unify the current multiple exchange rates in the country.

While agreeing that the new partnership deal would ease trade between the two countries by minimizing currency losses emanating from the prior conversion of Naira to dollars and back to the Yuan, the Chinese currency, Senior Economist at Covenant University, Ota, Ogun State Prof. Evans Osabouhien identified serious challenges for Nigeria in the future. In his view, the challenge is that there is a huge imbalance in the volume of trade between the two countries.

Osabouhien has a suggestion. “The only solution is that there must be deliberate policies put in place to increase our exports to China,’’ Osabouhien said.

LEADERSHIP reported last week that the currency swap has enticed some banks with international licence without presence in China to begin process that would allow them operate in the second world’s largest economy. As a matter of fact, some tier one banks with presence in Europe and other African countries have applied to the CBN to obtain approval to open shops in China. Some of the banks have also open talks with the CBN on how to get regulatory approval for them to open operational offices in China.

The tier 2 banks are actually threading with caution. They want to actually see the deal commence operation before they would know where to cash-in. Their fear is that if not well planned, jumping into the process could be harmful to their capital base.

Analysts believe the swap will cut back the demand for dollar as Nigerian businesses require more RMB, although 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 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. Toeing that same line, analysts at Afrinvest West Africa described the agreement between the two countries tries as a positive development, given the foreign currency liquidity squeeze Nigeria frequently experiences and the strong trade and investment ties between the two countries.

Like Ecobank Group which believes, many experts say in light of the new currency swap, they expect a strengthening bias on the NGN in the near term as this agreement is likely to improve FX liquidity and lead to higher flows from China.

Currency swap is a new bride in town that is not yet known to many Nigerians, including the business class who will be the major beneficiaries of the new romance between Nigeria and China. From the technology and electronic importers of the South Eastern Nigeria to the Jewries and clothing merchants of the North and the foot-wares Importers of the Western region, currency swap needs to be taught and learnt.

Call it currency swap or cross-currency swap it’s the same. According to Investopedia, currency swap is an off-balance sheet transaction in which two parties exchange principal and interest in different currencies. The parties involved in currency swaps are generally financial institutions that either act on their own or as an agent for a nonfinancial corporation.

A currency swap is similar to an interest rate swap, except that in a currency swap, there is an exchange of principal, while in an interest rate swap, the principal does not change hands. Instead, on the trade date, the counterparties exchange notional amounts in the two currencies. During the term of the transaction, each counterparty pays interest periodically, in the same currency as the principal received, to the other party. On the maturity date, the parties exchange the initial principal amounts, reversing the initial exchange at the same spot exchange rate.

Recent events indicate a better future for the Nigerian economy. Earlier this year, the United Kingdom promised to add Naira to its list of pre-approved currencies, indicating resolve to foster trade between both nations. If the promise by the UK Export Finance Agency becomes a reality, it will enhance the financial position of small and medium enterprises. By that, the naira would join other 62 pre-approved currencies directly accepted for trade by the UK Government. Professor Uche Uwaleke of the University of Keffi Nasarawa state is among those who believe that granting of a “pre-approved currency” status by UKEF will automatically give exporters from the UK the opportunity to their overseas customers UKEF-backed finance in local currency of the importers. He stated that it will enhance the financial position of small and medium enterprises as foreign exchange rise associated with international  trade is minimised thus eliminating a major source of uncertainty over debt servicing cost of credit facilities.


Benefits of Currency Swaps

A further look at the whole idea of currency swap shows that it enables corporate to exploit their comparative advantage in raising funds in one currency to obtain savings in other currencies. Currency swaps permit corporate to switch their loans from a particular currency to another depending on their expectations of the future movement of the currency and interest rates. It offers flexibility to corporate seeking to hedge the risk associated with a particular currency.

A company no longer has to live with a bad decision, if it has selected a wrong currency for its overseas funding operations, a currency swap can undo the damage. It is pertinent to also state that currency swap can be used to lock into exchange rates for a longer period and it do not require monitoring and reviewing.The currency swap mode can be chosen to restructure the currency base of companies liabilities.

Among other advantages, currency swaps are used to hedge exposure to currency risk on future receipts (asset swaps) and payments (liability swaps), and to raise funds at a lower cost. A high degree of liquidity in currency swap market ensures a steady supply of principals ready to assume the opposite side of a transaction. In a currency swap, the exchange rates at maturity are known at the outset. Early termination of swap contracts may be possible by agreement of the counter parties, while it can be entered into at any time during the life of the transaction, they are being used to hedge.






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