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$2.5b currency swap deal to ease forex liquidity pressure

There are indications that the $2.5 billion (Renminbi 16 billion) Central Bank of Nigeria (CBN) and Peoples Bank of China (PBoC) swap  is expected to reduce currency transaction cost for importers and ease foreign exchange (forex) liquidity pressure in Nigeria.

Nigeria’s ability to support, particularly in foreign currency, banks and importers was weakened by falling oil prices which has been eroding the country’s forex reserves and foreign currency revenue.

The forex crisis continued until the CBN introduced in April 2017 the Investors’ & Exporters’ (I&E) Forex window, which has attracted nearly $30 billion transactions to the economy, followed by a moderate rally in crude oil prices to about $76/barrel.

In an emailed note to investors, Afrinvest West Africa Limited, an investment and research firm, said the currency swap’s impact would be noticed during forex rate volatility and/or scarcity.

In the report titled: Gains of the Bilateral Currency Swap Agreement between the CBN and PBoC, Afrinvest said that consequent on the opening of the “Swap Line”, both central banks would exchange a stock of their local currencies (RMB 16 billion /N720 billion), which could either be extended by mutual consent at expiration in 2021 or reversed.

It 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  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),” it said.

It added that the Balance of Trade is heavily tilted in favour of China as import 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),” Afrinvest said.

The investment firm explained that given the established strategic importance of China as a major trade partner, the bilateral currency swap  would 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,” it said.

Lastly, it 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,” it said.

It, 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 emphasises the need to deepen domestic policies on improving competitiveness,” Afrinvest said.

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