The Central Bank of Nigeria recently entered into a currency swap agreement with the Peoples Bank of China, after two years of sustained and rigorous negotiations. Valued at Renminbi (RMB) 16 billion, or the equivalent of about $2.5bn, the currency swap 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.
Among other benefits, the currency swap 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. In addition, it will assist both countries in their foreign exchange reserves management, enhance financial stability and promote broader economic cooperation between the two countries.
The take-off of the agreement will make it easier for most Nigerian manufacturers, especially Small and Medium Enterprises and cottage industries to manufacture and export products, and 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 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. The deal will also protect Nigerian business people from the harsh effects of third currency fluctuations.
Following International Monetary Fund’s inclusion of the Chinese currency among the basket of reserve currencies that have Special Drawing Rights, China’s expanding role in global trade and the substantial increase in the international use and trading of the Chinese RMB, has encouraged China to enter into currency swap deals totalling over RMB 137 trillion with many countries.
Among the countries it has currency swap deals with, are the United Kingdom, Belarus, Malaysia, South Africa, Australia, Armenia, Ethiopia, Surinam, Hong Kong, Pakistan, Thailand, Kazakhstan, South Korea, Canada, Qatar, Russia, the European Union, Sri Lanka, Mongolia, New Zealand, Argentina, Switzerland, Iceland, Albania, Hungary, Brazil, Singapore, Turkey, Ukraine, Indonesia, Uzbekistan, and the United Arab Emirates. Nigeria is the third African country it signed the currency deal with.
The currency swap agreement with China will benefit Nigeria because it will position Nigeria as the trading hub with China in the West African sub-region for people who want the Chinese RMB as a currency denomination.
For Nigeria, the currency swap arrangement will improve trade with China, as it will encourage importers to open L/Cs in the Chinese currency for the importation of raw materials, equipment and machinery from China. Also, following increased trading activities between Nigeria and China, the CBN had a few years ago diversified about 10 percent of Nigeria’s foreign exchange reserves away from the U.S dollar to Yuan, the Chinese currency.
Meanwhile, First Bank of Nigeria Limited, Stanbic IBTC, Standard Chartered Bank and Zenith Bank have been appointed the settlement banks for the bilateral currency swap agreement. The four banks will be responsible for settling the trade transactions between importers and exporters from both countries.
The four financial institutions were chosen because StanChart and Stanbic already have operational offices in China, while First Bank and Zenith Bank have representative offices in Beijing. The two banks are now required to upgrade their representative offices to full operations in China.
However, against these benefits, the currency swap has its downside risks for Nigeria. So, if Nigeria wants to achieve full benefits from the currency swap, it must develop competitive advantage in the production of those exportable goods that China currently imports.
China is Nigeria’s second biggest trading partner after the U.S, with trade volumes between the two nations totalling $9.2 billion in 2017. Nigeria runs a trade deficit, importing $7.6 billion worth of goods, including textiles and machinery from China and exporting just $1.6 billion, mainly oil and gas.
This negative trade balance means that Nigeria must substantially increase its exports to China; otherwise, its trade deficit with China will continue to
