Nigeria-China currency swap unlikely to improve value of naira
Nigeria’s currency swap deal with China which was touted as a way of strengthening the naira, may not be able to make much difference BusinessDay findings reveal.
The currency swap deal which is expected to improve trade relations between both countries, will make payments easier for Nigerian importers who spend up to N1.7 trillion importing from China annually, but the currency swap will on the average, only cover about 15 percent of importation costs over its three year period. Up to 85 percent will still require dollar payments.
“We believe that the deal will only facilitate the ease of trade transaction between Nigeria and China which only accounts for less than 20 percent of Nigeria’s total annual imports. While the remaining 80 percent of our import needs will still be met using Dollars,” said Robert Omotunde, head of research at Afrinvest Securities Limited.
Omotunde further explained that this currency swap deal will only ease the dollar pressure by three percent which is miniscule compared to what is needed to support the Naira.
“Any swap deal should have been focused on reducing the dollar demand for importing petroleum products which accounts for up to 30 percent of total importation in Nigeria. This (type of) deal would have been more beneficial to the Nigerian economy,” he said.
Muda Yusuf, director general, Lagos Chamber of Commerce and Industry (LCCI), also told BusinessDay that the currency swap will not “make any significant impact on the value of the naira.”
“The main advantage is that it will ease the payment process. Since we have a lot of imports from China, rather than receive your invoice in dollar, which is then converted to Yuan over there, you can now take invoice in yuan and pay directly,” Muda explained.
He further elucidated that, “the entire value of the swap which is about $2.5 billion for three years, does not even cover trade for (only) one year.”
His position corroborates Omotunde, who had also explained that Nigeria’ trade relationship with China in 2017 was almost N2 trillion. With a currency swap deal worth N720 billion, the value of cash being swapped is not enough to cover up to 50 percent of trade with China in one calendar year.
If the Central Bank spreads the swap funds over the three years, BusinessDay estimates that only N240 billion will be available for importers annually. Earlier in May, the Central Bank of Nigeria (CBN) signed a currency swap agreement with the Peoples Bank of China (PBOC) to swap N720 billion for 15 billion Chinese Renminbi (RMB) in the first currency swap deal between both nations in modern history. In June, the CBN published the Regulations for Transactions with Authorised Dealers in Renminbi. This document outlined what is expected of commercial banks, merchant banks, other authorized dealers as well as importers who are all key players in the currency swap deal.
CBN claimed that signing the Naira Yuan swap deal would reduce excess dollar demand in Nigerian trading and investment activities. This deal according to CBN will increase the strength of the Naira by reducing the Dollar round tripping when Nigeria trades with China. However, these expectations from the CBN appear to be lofty, as the views of economic experts indicate not much change will be recorded, and perhaps, negligible if any.
Dolapo Ashiru, a Lagos based investment analyst also told BusinessDay by phone, that he believes the swap deal will be more favourable to China which is trying to reaffirm its currency as a global reserve currency.
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