What $2.5b currency swap deal means for banks, economy

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The much-awaited guidelines for the $2.5billion currency swap deal between the Central Bank of Nigeria (CBN) and The Peoples Bank of China (PBoC) have been unveiled. The deal will widen the trade window for local banks and increase their revenues. But, it could worsen the widening trade gap between Nigeria and China. The deal, which is valid for three years in the first instance, is renewable if approved by both countries. COLLINS NWEZE writes on what the Federal Government must do to reap the benefits of the deal.

Local banks stands to gain from the $2.5 billion currency swap deal between Africa’s largest economy, Nigeria, and the world’s second largest economy, China.

The economies of both countries need each other, and so do their businesses and banks. The banks in both countries are not only going to be earning fees from the ensuing transactions, but will begin new lending to businesses.

These gains and the need to keep the naira stable prompted the Central Bank of Nigeria (CBN) to sign the bilateral currency swap agreement with the People’s Bank of China (PBoC).

In local currencies, the swap is worth 15 billion Renminbi (RMB) or N720 billion. The three-year renewable  deal  will  allow  for  the  direct exchange of RMB and naira for the purpose of trade and direct investment between both countries.

According to the PBoC, the aim of the swap arrangement is to facilitate  bilateral  trade,  direct  investment,  and  safeguard financial market stability. The trade is expected to reduce the demand for United States dollar by Nigerians importing from China and consequently  strengthen  the  value  of  the  Naira.  The deal will reduce  certain  barriers  for  Nigerian  importers  of  goods  from China   and   reduce   the   cost   of   transactions   in   multiple currencies.

FSDH Research has therefore reviewed the historical trade position between Nigeria and China to determine the benefits of the swap deal. Its review in the last five years shows that Nigeria’s imports from China are higher than the exports to China, leading to a negative trade  balance.

China  has  been  one  of  Nigeria’s largest  import  partners  over  the  last  five  years, with  imports from  China  accounting  for  an  average  of  20.95 per cent  of  total imports   between   2013   and   2017.

Imports   from   China increased  by  21.16 per cent  from  N1.48  trillion in  2013  to  N1.79 trillion in 2017. On the other hand, Nigeria’s exports to China averaged just 1.50 per cent  of  total  exports  over  the  period.  Exports  to  China increased  by  28.99 per cent  from  N171  billion  in  2013  to  N220.57 billion in 2017.

FSDH  Research therefore considers that  while  the  currency  swap agreement may improve foreign exchange stability and aid external   reserves   management   to   a   certain   extent,   it presents downside risks.

“The fact that it removes some trade barriers between the two countries may increase Nigeria’s imports    from    China.    This    development    without    a corresponding increase in Nigeria’s  exports  to  China  will further increase Nigeria’s trade deficit with China. Nigeria needs to develop competitive advantage in the production of certain  exportable  goods  that  China  currently  imports  in order  for  Nigeria  to  get  the  full  benefit  from  this  currency swap deal,” the research firm said.

Speaking on the development, Chief Economist at Renaissance Capital (RenCap) Charles Robertson, said the $2.5 billion bilateral currency swap agreement is expected to boost Nigeria’s foreign reserves.

Speaking during the investors’ conference organised by RenCap in Lagos, he said the deal would reduce the use of the third currency, mainly dollars in the transaction chain.

Nigeria’s ability to provide support, particularly in foreign currency to commercial banks and importers was weakened by falling oil prices eroding the country’s forex reserves and foreign currency revenues.

Also, in an emailed note to investors, Afrinvest West Africa Limited, an investment and research firm, said the currency swap deal’s impact will be noticed in periods of forex rate volatility and/or scarcity in the country.

In the report titled: Gains of the Bilateral Currency Swap Agreement between the CBN and PBoC, Afrinvest said consequent on the opening of the “Swap Line”, both central banks would exchange a stock of their local currencies (RMB 15 billion /N720 billion), which could either be extended by mutual consent at expiration in 2021 or reversed.

Afrinvest Managing Director, Ike Chioke, said the pact, which was as a result of over two years negotiations between both banks, would provide adequate local currency liquidity for Nigerian and Chinese industrialists and other businesses in order to reduce their difficulties in the search for a third currency.

“We view the agreement 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 the trade statistics by the National Bureau of Statistics (NBS), merchandise trade between China and Nigeria reached a record high of N2 trillion in 2017 (8.7 per cent of total Merchandise trade), thus making 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),” he said.

Also, the Balance of Trade is heavily tilted in favour of China as imports from China in 2017 (N1.8 trillion) was eight 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 suggestive of Nigeria’s growing dependence on China, much like most of the rest of the world, for manufactured products and industrial inputs, reinforcing the importance of this currency swap agreement for Nigeria’s import dependent manufacturing and trade sectors which jointly contribute 27.8 per cent to Gross Domestic Product (GDP),” he said.

Besides, 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 fulfill imports demand,” he said.

Lastly, he added that 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 minimised.

“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. Whilst we are excited by the symbolism of this agreement, we also note that the impact on the economy will be limited by the relatively small size of the Swap Line, which could barely cover 40 per cent of Nigeria’s Chinese import in a single year,” he said.

He however, highlighted a key downside risk to the agreement, which is that the ease of transaction with a highly competitive country like China 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 emphasizes the need to deepen domestic policies on improving competitiveness,” it said.

Former Executive Director, Keystone Bank, Richard Obire, said as middlemen, banks in both countries will earn new fees, and initiate new credit facilities for merchants. “The currency swap deal will expand the capacity on what the banks can do. Besides, customers in both countries will have their transaction base expanded, including new opportunity to import or export equipment, raw materials and finished goods,” he said.

Obire explained that Nigeria need to take measures that will ensure it begins to export finished products to China, and such would create jobs and capacity at home. “We are currently at the raw materials exporting stage and until that is changed to finished goods export, Nigeria may not get the full benefits of the deal,” he said.  (The Nation)

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