Yuan shrinking dollar’s domination of Nigeria’s forex market - PUNCH
Since the commencement of the currency swap agreement between Nigeria and China in August 2018, the Central Bank of Nigeria has intervened with over 1.56bn Chinese Yuan, Ifeanyi Onuba reports
The currency swap agreement between Nigeria and China was signed on April 27, 2018, after two years of negotiations between the Central Bank of Nigeria and the People’s Bank of China.
The transaction, which valued at Remnibi 16 billion, or the equivalent of about $2.5bn, was aimed at providing adequate local currency liquidity to Nigerian and Chinese industrialists and other businesses.
It was also targeted at reducing the difficulties encountered in the search for third currencies in the execution of business transactions between Nigerian and Chinese industrialists.
Among other benefits, the agreement was to 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 sale of foreign exchange under the agreement is being done through a combination of spot and short tenured forwards.
The exercise is in form of Special Secondary Market Intervention Sales retail and is dedicated to the payment of Renminbi denominated Letters of Credit for raw materials and machinery and agriculture.
In implementing the agreement, the apex bank usually receive bids from all authorised dealers, who will submit their customers’ bids.
In funding the pact, authorized dealers would be required to debit the customers’ accounts for the Naira equivalent of their bids, while the CBN would debit authorised dealers’ current account on the day of intervention to the tune of the naira equivalent of their bid request.
Based on analysis of the market, the CBN usually carry out its yuan intervention once a week. Findings revealed that the weekly intervention usually ranges between 30m and 35m Remnibi.
Going by the average supply of $32.5m Remnibi from these amount, it is estimated that over 1.56bn Remnibi may have been injected into the market by the CBN in the last one year.
Speaking on the apex bank’s interventions, the Director, Corporate Communication Department, CBN, Mr Isaac Okorafor, described the apex bank interventions in the foreign exchange market as satisfactory.
He told our correspondent in a telephone interview that since the implementation of the currency swap agreement, the demand for dollar required to import goods from China had reduced.
He explained that Nigerians willing to import equipment from China have been taking advantage of the agreement, adding that the pact had been beneficial to the country.
He said, “The CBN intervention as regards the Yuan is going on very fine. The demand keeps coming and we have been selling to them and importers importing equipment are very satisfied with the intervention and we are satisfied with the performance so far.”
Findings by our correspondent revealed that Nigeria’s trade with China has been on the increase within the last 12 months since the commencement of the agreement.
For instance, figures obtained from the National Bureau of Statistics showed that Nigeria and China recorded a total of N673.23bn as the third quarter of 2018. This is made up of import value of N591.36bn and an export of N81.87bn.
The figure moved from N673.23bn in the third quarter to N1.08tn in the fourth quarter of last year.
The composition of the fourth quarter 2018 trade of N1.08tn showed that import accounted for N900bn while the balance of N184.97bn was for exports.
In the first quarter of this year, Nigeria’s trade with China was put at N1.13tn. Of this amount, import stood at N979.29bn while export was N146.48bn.
In the second quarter, trade between both countries peaked at N1.18tn made up of import of N1.02tn and export of N157.15bn.
Some finance experts said that the deal had been able to boost Nigeria’s foreign reserves position within the last few months.
The analysts said this during separate telephone interviews with our correspondent in Abuja.
The President of Abuja Chamber of Commerce and Industry, Adetokunbo Kayode, said that the initiative had deepened Nigeria’s economic opportunities with China and eased payment issues that were hitherto associated with international trade.
Kayode said Nigeria’s trade volume with China had been positively impacted by the deal.
He said, “I believe that this swap deal will enable Nigeria and China to easily trade among themselves in local liquidity without the trouble of having to switch through an intermediary currency.
“This, no doubt, eased the mode of transaction of businesses across the two countries.
“For us in the Organised Private Sector, the essence is not far-fetched because it has simply made China willing trading hub by Nigeria, the West African sub-region and indeed the whole of Africa.
“This will make the Remnibi a free flow currency in the banks in Nigeria and is consequently included in our external reserve.
He added, “Let me emphasise that this currency swap means that the Chinese Yuan has the capacity and capability to stand shoulder-shoulder with other internationally recognised vibrant currencies such as dollar, Euro and pounds.
“It therefore behoves on us in the OPS to see this opening as a low hanging fruit that can easily help improve our business concerns. Now our banks can open letters of credit in Yuan instead of only the Dollar, Euro or Pounds.”
The Registrar, Chartered Institute of Finance and Control of Nigeria Mr Godwin Eohoi, said the transaction had so far provided currency liquidity to Nigerian and Chinese industrialists and other businesses.
This, he noted, had assisted in reducing the difficulties encountered in the search for third currencies in the execution of business transactions between Nigerian and Chinese industrialists.
Eohoi said the agreement had also improved the speed, convenience and volume of transactions between the two countries.
He said, “With Chinese exports accounting for about 80 per cent of the total bilateral trade volumes, it has been argued in some quarters that Nigeria does not stand to reap any commensurate benefit from the deal given the large trade imbalance in favour of China.
“Nonetheless, it is pertinent to observe that asymmetric trade in favour of China can be tackled within the framework of the agreement.
“It is safe to conclude that the swap arrangement is being established in the context of the rapidly growing bilateral trade between China and Nigeria.
“Therefore, the currency swap will boost trade between China and Nigeria.
“It is also expected to bolster Nigeria’s foreign exchange reserves at a time weak export revenues, occasioned by the drastic fall in oil price, have put the country’s foreign reserves under intense pressure.”
When asked if the agreement had helped in strengthening the naira, he said the pressure from Nigeria traders on demand for dollars had as the value of the Naira is beginning to appreciate.
“The currency swap deal is assisting in strengthening the naira since Nigerian traders, who import mainly from China, can now conclude their transactions in the yuan instead of the dollar.
“And from China’s point of view, the currency swap will increase the demand for the yuan as it marches toward establishing its currency as a reserve currency in the future. Without doubt, a currency swap deal with China, as the experiences of other countries have proved, is a win-win.”
Also, a former Director-General, Abuja Chamber of Commerce and Industry, Chijioke Ekechukwu, said the implementation of the agreement was minimising foreign exchange denominated risks for Nigeria.
He said, “Within the context of minimising concentration risk of having our foreign exchange denominated in the United States dollar alone, the currency swap deal is a positive development.
“Secondly, in view of our huge imports from China, this agreement has helped in reducing the time as well as transaction costs by eliminating third-party currency deals.
“Reduced transaction costs will make goods imported from China cheaper to both importers and ultimately Nigerian consumer.
“This may negatively impact on our diversification efforts by making Chinese imports cheaper. However, there is no impact on the economy as far as the balance sheet of the central bank is concerned.”
Ekechukwu said the agreement is assisting in reducing the exchange rates between both countries.
He said, “It is an agreement to exchange currency between two countries or parties. The agreement involves swapping principal and interest payments on a loan made in one currency for principal and interest payments of equal value in another currency.
“In the case of Nigerian and Chinese currency swap agreement, it is a win-win situation for the two countries as it will foster seamless business relationships between them.”
He said the exchange rate volatility will be reduced with this agreement, especially at the point of repayment.