With oil, the commodity that accounts for over 90 per cent of Nigeria’s forex earnings, generally priced and traded in dollars, the country’s economic fortunes is inextricably linked to the U.S. currency. However, Nigeria’s currency swap pact with China could alter things. TONY CHUKWUNYEM writes
Just when speculation was beginning to mount that the currency swap deal, which Nigeria and China had reportedly discussed during President Muhammadu Buhari’s visit to that country in April 2016, had fallen through, the Central Bank of Nigeria (CBN) last week announced that the agreement was signed on April 27 this year.
In a statement, CBN spokesman, Mr. Isaac Okorafor, said the CBN Governor, Mr. Godwin Emefiele, led CBN officials while the Governor of the Chinese central bank, the People’s Bank of China (PBoC), Dr. Yi Gang, led the Chinese team at the official signing ceremony for the transaction valued at renminbi (RMB) 16 billion about ($2.5 billion).
According to the CBN, the deal was 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.
CBN appoints settlement banks
Reports also emerged last Friday that just as negotiations on the currency swap were being concluded, the banking watchdog appointed FirstBank, Stanbic IBTC, StanChart and Zenith Bank to serve as the settlement banks for transactions between importers and exporters from both countries under the agreement, which is expected to take off just before next month.
A CBN source was reported as saying that the four financial institutions were chosen because while StanChart and Stanbic already have operational offices in China, Zenith and FirstBank have representative offices in Beijing.
The source, however, disclosed that whereas StanChart and Stanbic can start operations immediately as settlement banks, Zenith and FirstBank will be required to upgrade their representative offices to full operations in China.
Specifically, the source was quoted as saying : “While StanChart already has a presence in China through its Standard Chartered Bank (China) Limited, Stanbic has been trading in the country through its affiliate, the Investment and Commercial Bank China (ICBC).
“So, while StanChart and Stanbic can start immediately, it would take FBN and Zenith Bank some time to join the settlement arrangement because they would have to convert their representative offices to operational offices.”
Reducing dollar demand
Although the CBN statement did not shed much light on the technical details of the agreement, the apex bank’s boss, Emefiele, had while commenting on the initial discussions held on the deal in April last year, explained that it was targeted at strengthening the naira and reducing the strong demand for the dollar in the country.
Noting that as the second largest economy in the world, more and more countries were turning to China for business and that the Asian nation was also trying to make its currency a convertible global currency like the dollar, British pound sterling, the euro and the Japanese yen, Emefiele pointed out that several other countries – developed and emerging markets – with growing trade volumes with China had entered into such currency swaps with the Asian giant.
The CBN Governor had then stated: “The agreement on the currency swap with China will definitely benefit Nigeria because the essence of the mandate is to ensure that Nigeria is designated as the trading hub with China in the West African sub-region for people who want the renminbi as a currency denomination.”
Besides, he said: “Also for us, we believe that using the renminbi will improve trade with China, as this will encourage importers to open L/Cs in the Chinese currency for the importation of raw materials, equipment and machinery from China, rather than other trading regions, so the agreement will encourage trade between both countries.”
Interestingly, also commenting on the discussions, Director General of the African Affairs Department of China’s foreign ministry, Lin Songtian, disclosed that a framework on currency swaps had been agreed with Nigeria, making it easier to settle trade deals in renminbi (yuan).
According to the Chinese official: “It means that the renminbi (yuan) is free to flow among different banks in Nigeria, and the renminbi has been included in the foreign exchange reserves of Nigeria.”
Foreign reserves diversification
However, the decision to include the renminbi in Nigeria’s foreign exchange reserves had been taken in 2011 by the CBN during the tenure of its former Governor, Sanusi Lamido Sanusi. The former CBN Governor had announced that the regulator would switch between 5 and 10 percent of its dollar buffers into yuan as part of plans to diversify the reserves away from the dollar. He stated that though the dollar, which accounts for the bulk of the country’s reserves would, “remain an important part of our holdings,” it was necessary for the country to switch a portion of the reserves into yuan in order to reduce the country’s reliance on the US currency.
Yuan joins IMF’s SDR basket
Indeed, Nigeria’s decision to include the renminbi in its foreign exchange reserves seemed to have been justified when in September 2016, the Chinese currency joined the dollar, the euro, the yen and British pound in the IMF’s Special Drawing Rights (SDR) basket (basket of reserve currencies).
Although critics argued that the development was largely symbolic as the yuan does not fully meet IMF reserve currency criteria of being freely usable, or widely used to settle trade or widely traded in financial markets, analysts predicted that it would further boost the Chinese currency’s credibility in the international financial markets.
In fact, since that announcement, the European Central Bank last June last switched 500 million euros worth of its U.S. dollar reserves into yuan while Germany’s Central Bank last January announced that it had decided to include the Chinese currency in its foreign exchange reserves.
Experts’ divergent views
Perhaps, against this background, it came as no surprise to most industry watchers that financial experts across the country commended the CBN for the currency swap deal.
For instance, reacting to the agreement in a chat with New Telegraph, Managing Director/Chief Executive Officer, Bic Consultancy Services, Dr Boniface Chizea, said the deal was a positive development as it would provide adequate local currency liquidity to Nigerian and Chinese companies thereby boosting trade between both countries.
He said: “The deal will help to eliminate the challenges associated with having to use a third currency. It is not like the CBN will start providing cash to businesses, but there will be something like a book keeping arrangement in which the CBN will keep a record of the yuan (Chinese currency) requests of Nigerians. Another advantage of the deal is that it will further improve our foreign exchange reserves because with the opportunity to access yuan directly from the CBN there will be less demand for dollars.”
He, however, pointed out that the deal could face challenges with regard to clarity about the exchange rate that will be used for transactions and the risk that it could further put China at an advantage over Nigeria in terms of trade between both countries.
Also, in his reaction, Developmental Economist, Mr. Odillim Enwagbara, said: “Currency swap brings to an end multiple exchange rates – from naira to dollars and dollars to yuan. This reduces the current high cost of transaction associated with dollar as the world’s de facto reserve currency since the swap arrangement bypasses the dollar”.
Similarly, in his reaction, former Unity Bank MD, Rislanudeen Mohammed , said: “In the context of minimizing concentration risk of having our foreign exchange denominated in United States dollar alone, this is a positive development. Secondly, in view of our huge imports from China, this agreement will help in reducing time as well as transaction cost by eliminating third party currency deals. Reduced transaction cost will make goods imported from China cheaper to both importers and ultimately, the 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 central bank is concerned.”
The Managing Director, Crane Securities, Mr. Mike Eze, also strongly welcomed the deal. He said: “The deal is in line with the Federal Government’s desire to attract foreign investment. This will definitely boost our economy.”
He dismissed concerns that China might benefit more from the deal than Nigeria, arguing that the CBN would not have signed the deal without considering its benefits to the country.
“By the time you study the nitty-gritty of the deal, you will realise that it also favours Nigeria,” he stated.
However, a notably divergent view was offered by the Chief Executive of Financial Derivatives Company (FDC) Limited, Mr. Bismarck Rewane, who argued that he did see the transaction having any significant impact on the nation’s economy.”
He said: There is no difference. As far as I’m concerned, the difference is between 6 and half a dozen. If it is a currency swap, why is it denominated in dollars? The reason is that you will have to sell your oil to earn dollars, which you will use to buy yuan. So there is no difference.”
Also, the Principal Consultant, Henates and Associates, Mr. Henry Atenaga, contended that the only way the deal will positively impact the nation’s economy was for Nigeria to insist that Chinese exports to the country under the agreement should consist mainly of products that are critical to the nation’s manufacturing and real sector.
“Unless they find a way of ensuring that whoever is importing goods from China into the country under the arrangement is only bringing in things that are critical to our economy, then the deal will only boost Chinese exports to our detriment,” he stated.
However, as a top official of a new generation bank, who did want to be named, stated: “There was already widespread concern globally about China’s trade practices, which usually mean that while they will do everything they can to gain access to your market, they try to shut out imports. So I will be surprised if the CBN officials did not have this at the back of their minds when they were negotiating the agreement.
“If the Chinese want the yuan to really compete against the dollar, they should ensure that other countries perceive them to be fair in their trade practices,” the official added.
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