Barely one year after the Central Bank of Nigeria (“CBN”) on June 6, 2018, issued its Regulations for Transactions with Authorised Dealers in Renminbi, the Chinese currency, Nigerians especially those with an eye for trade and commerce have been talking and taking some retrospective look at the implications of the deal on the local economy and particularly the Naira exchange rate.
Nigeria thus also became the first African country to include the Chinese renminbi (RMB) in its foreign reserves portfolio, as government believes it was better of with a diversified reserves basket.
The swap deal with a three year -tenor allows both the CBN and PBoC to swap a maximum amount of Fifteen Billion Renminbi/Chinese Yuan (CNY 15 billlion) for Seven Hundred and Twenty Billion Naira (NGN 720 billion), about US$2.5 billion at an exchange rate of NGN305: 1US$.
The purpose of the Swap agreement is to finance trade and investment between China and Nigeria, maintain financial market stability; and facilitate other initiatives as may be agreed upon by both countries.
Indeed the two monetary authorities had sought to create a platform that provides Naira liquidity to Chinese firms and investors looking to do business with Nigeria on the one hand; and also provides Chinese Yuan liquidity to Nigerian firms and investors looking to do business with China on the other.
Another objective of the bilateral agreement is to aid trade transactions between China and Nigeria by removing the need to first source for the US Dollars before payments for transactions involving the two countries can be made.
Under this agreement the CBN and the PBoC shall , make available liquidity in their respective currencies for the facilitation and promotion of trade and investments between the two countries through the purchase, sale, and subsequent repurchase and resale of the Chinese Yuan against the Naira at an agreed intervention period
However in order to checkmate possibility of abuses by users of the facility, Authorized Dealers are not permitted to open domiciliary accounts denominated in Renminbi for customers, as importers who intend to import goods from China shall obtain pro-forma invoices denominated in Renminbi, as part of the documents required for the registration of “Form M”; while foreign exchange purchased in the window cannot be used for payments on transactions in which beneficiaries are not domiciled in China;
They are also expected to utilise the funds within 72 hours from the value date or return such funds to the CBN for repurchase at the apex bank’s buying rate; as bids shall be settled spot through a multiple-price book bidding process, and will cut-off at a marginal rate (which will be disclosed after the conclusion of a Special Secondary Market Intervention Sales.
Indeed, in all relevant particulars, the Nigeria-China Currency Swap Agreement stands out quite significantly in many respects, considering the impact Chinese businesses and government have had in Nigeria and several other African countries in the past two decades.
From the information and communication technology space, to household equipment, food, pharmaceuticals, textiles and garments, construction oil and gas industries, Chinese influence are becoming quite visible and can no longer be taken for granted.
The best government can do in this instance would be to court deals that deliver more values to its people and economy and there lies the logic behind CBN’s currency swap agreement.
For this reason, the deal will will be beneficial in allowing trading between the two countries to be done directly in their local currencies without any need for the dollar, and enabling the Renminbi (Yuan) to flow freely within the Nigerian banking system. In this regard, it will improve bilateral trade between the two countries and engender foreign investment flows and economic cooperation beneficial to both parties.
But in spite of the small value attached to the deal, many believe a significant cut on dollar demand by firms and investors doing business across the two countries will help tame financial market sentiments and boost their respective foreign reserves by suppressng demand pressure, thus saving people the agony often created by spurious forex demand that buffeted the economy in the past years.
However, since the launch of the deal, the general concerns about the capacity of the swap agreement to fully address the challenge of dollar demand by importers still remains, particularly as imports from China account for only 20 percent of Nigeria’s annual total imports. Nigerian enterprises current import bill from China reportedly stands at NGN 1.7 trillion, meaning that the swap deal amount of NGN 720 Billion can only take care of about 15 percent of the country’s annual total imports from China.This also means that the remaining 85 percent will definitely still require dollars.
Notwithstanding this gap, it was imperative that the Nigerian and Chinese authorities took that decisive starting step which can now be scaled up at the expiration of the deal’s current three- year tenor.
But in spite of whatever concerns anyone could raise, some observers are still of the view the deal stands as a step in the right direction on the part of financial and fiscal authorities given that the anticipated reduction in dollar demand, to be achieved through it will complement CBN’s current forex intervention via the Investors’ and Exporters’ FX Window in strengthening stability in the market to checkmate incidences of dollar scarcity and exchange rate volatility that created foreign currency bottlenecks of 2015/2016.
For other commentators, the NGN/CNY swap agreement will be particularly good for Nigeria’s foreign reserves seen to have been on the upsurge with the return of some measure of predictability and stability in the country’s daily crude oil production and international oil prices at the time the deal was first consummated.
In the last one year, the Naira exchange rate has also been positively impacted by the CBN-PBoC having stabilised relative to the dollar despite some unhealthy swings in the international oil market. Over this period, rates have hovered at an average of N362-N365 to the dollar, thus lowering the tension associated with the market before then.
According to the Central Bank of Nigeria (CBN), the bilateral currency swap agreement with the Peoples Bank of China (PBoC) will help ease the liquidity challenges faced by Nigerian traders and Chinese manufacturers as businessmen will now have sufficient naira to purchase raw materials from Nigeria while importers from Africa’s largest economy will be spared the challenge of ‘third currency’ fluctuations when trying to make payments for Chinese exports.
The deal structured purely around 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. This however opens another window of opportunity for Nigerian entrepreneurs to leverage the deal to export more to China particularly now that President Muhammadu Buhari administration appears committed to diversifying the economy away from oil.
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“Indeed, the deal will protect Nigerian business people from the harsh effects of third currency fluctuations,”
CBN said in a statement.There are overwhelming indications that several Nigeria products including agricultural and other raw materials and semi processed goods command strong market demand in China. Nigerian manufacturers, cottage industry players and anyone who needs imports from China will be able to secure RMB from Nigerian banks:
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“With the commencement 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 listed benefits of the deal to include helping both to manage their reserves better among other benefits: “It will also assist both countries in their foreign exchange reserves management, enhance financial stability and promote broader economic cooperation between the two countries.For instance the Central Bank Governor, Mr Godwin Emefiele, said at forum of importers and exporters in the north Central zone that the deal will not cover imports of substandard good into the country.
The deal was meant to facilitate trade between Nigeria and China and ensure stability in the foreign exchangemarket, among others.
Emefiele, represented by the bank’s acting Director, Corporate Communications, Mr Isaac Okorafor, said the swap deal has the potential to reduce importation of substandard goods.
He said only goods approved by regulatory bodies such as Standards Organisation of Nigeria would qualify under the agreement, warning that those thinking to collect Renminbi through cbn window to sell on the street would roundly disappointed.
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“Transactions under the deal will be done electronically and this deal is only for products that originate from China.
“It does not apply to any transaction in Asia, outside the Chinese territory,”
he said.“It does not apply to any transaction in Asia, outside the Chinese territory,”
Also, speaking Mr Oreva Eweh, the Assistant Director, Financial Market Department, CBN, cited speed and efficiency as some of the benefits of trading under the Renminbi denominated window for transactions with China.
“Also, the foreign exchange window cannot be used for payments on transactions in which the beneficiaries are not in China.
Many have commended the apex bank for excluding Bureau de Change Operators from taking part in the transaction considering the role the parallel market has played in the nation’s exchange rate crises over the years.
But Mr Adetokunbo Kayode, the Director-General, Abuja Chamber of Commerce and Industry, Mines and Agriculture (ABUCCIMA), believes the currency swap deal would make doing business easier for the organised private sector even as he called on the government to implement favourable business policies to fast track economic growth in the country.
For its part, the Association of Bureau de Change Operators of Nigeria urge the Federal Government to utilise the currency swap agreement with China to strengthen Naira.
Its President Aminu Gwadabe, made the call in Lagos, Nigeria’s economic hub shortly after the deal was unveiled. He advised the apex bank to deepen currency swap pact with China and diversify commodity exports to the U.S. in order to diversify foreign exchange earnings of the country.
Nigeria should focus on diversifying its foreign exchange earnings through the promotion of Diaspora remittances for economic buffer and foreign reserves accretion, he added. The interventions, during the 12-month period, done at various exchange rates, ranging from N48 to N58 per CNY, at an average of N54/CNY, have been estimated at N64.02 billion.
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