Nigeria-China N720bn currency swap collapses

Three years after the Central Bank of Nigeria (CBN) signed a currency swap deal with the People’s Bank of China (PBoC), Nigerians are yet to feel the impact of that arrangement, especially as the free fall of naira, currently standing at N570/$1 at the parallel market persists.

In April 2018, the CBN issued the regulations for a US$2.5 billion currency swap agreement in June same year; designed to facilitate trade between the two countries and enhance foreign reserve management.

But tongues have already started wagging that the N720 billion swap deal for at least 15 billion Yuan (Renminbi) (equivalent of $2.4 billion in June 2018) between the two countries has failed to achieve its purpose since it was sealed.

The Bilateral Currency Swap (BCS) agreement was inspired by trade facilitation. It was to allow importers of goods from China to conclude their transactions in Yuan instead of the US Dollar) and vice-versa. This was done to reduce the demand of the US dollars, lift the undue pressure on the naira at the time, consistent with the CBN’s naira management strategies.

While the CBN has continued with the implementation of the BCS with the Peoples’ Bank of China through fortnightly Renminbi auctions, it was gathered that bureaucratic bottlenecks have become a major challenges for traders and importers transacting business with China.

According to CBN’s Financial Markets Activity Report for Half Year 2020, CNY1, 746.40 million has been sold from inception to the end of June 2020, which is N89.12billion using CNY/N51.03 as conversion rate (as of June 2020).

Prior to the agreement, the CBN was in discussions with China on the deal for more than two years. Nigeria is the third African nation (after South Africa and Egypt) to sign a currency swap deal with China. The agreement was to allow the two countries to swap a total of 15bn Yuan (renminbi) for N720billion or vice-versa for three years and would be extended by mutual consent, for the purpose of trade finance and direct investment between the Peoples’ Republic of China and the Federal Government of Nigeria and maintain financial market stability.

Following the implementation of the initiative, the value of the domestic currency also responded to the news amongst other factors. The Naira was selling at N48.6/CNY in January 2018 before the announcement, it appreciated by 494base points (4.94%) after the deal had been signed and announced. It further appreciated by +8.23 per cent at the end of the year (2018).

In December 2020, the Naira against the Chinese Yuan had depreciated by -30.27 per cent against the gains recorded in 2018, this can be attributed to demand for the Yuan as the US dollar became even more expensive for business transactions, more awareness of the swap deal with China by traders and the adjustment of the naira by CBN during the period. Although, CBN has not released data showing how much Renminbi has been sold between July 2020 till date.

Analysts in Proshare expected the naira to have depreciated further against Yuan, this is because converting directly to the Chinese currency for transactions in China would be cheaper than converting to US Dollar, then converting to the Yuan for importation/trading. However, unnecessary delays, bureaucracy, and corporate bottlenecks in accessing the Renminbi have been the experience for most traders involved in business transactions with Chinese firms.

In 2018, imports from China accounted for 25.12 per cent of total imports to the country, while China was not part of the top ten (10) export destinations of Nigerian products. There was a decline in 2019 to 20.49 per cent, which was defied analyst expectation, as goods from China were expected to be cheaper following the currency swap deal, thereby increasing our imports from the country.

There was a rebound in 2020 which continued in Q1 2021, accounting for 29.34 per cent of total imports to Nigeria. Our export position with Nigeria has also increased, accounting for 4.91 per cent and 6.5 per cent of total export in 2020 and Q1 2021 respectively.

The swap deal had the potential of improving the FX position of the country as China accounts for a large portion of our imports. However, implementation has always been a huge hurdle for the Nigerian government, and this policy has not proved to be an exception, another failed policy.

The target of N720bn to 15bn Renminbi to be swapped in three years has not been met, traders and importers still have to US dollars, then the Yuan for business transactions with Chinese firms, which is expensive leading to a constant hike in the prices of commodities imported from China, as the cost of operations is passed to the final consumers trickling down to rise in inflation. Also, the value of the Naira against the US dollar is still depreciating (selling at N570/USD at the BDC market today.

Meanwhile, as the Naira continues to depreciate against the Dollar, some experts have expressed concern that the deal with China, which was welcome with high hope to salvage the local currency, has been sabotaged by regressive economic forces, so says an analyst.

According to Lukman Otunuga, a Senior Analyst with FXTM, the deal failed to achieve its goal three years after it was launched because the same destructive forces sabotaging the Naira remain present as ever. “A terrible combination of dollar shortages, inflationary pressures, weak macroeconomic conditions, exposure to external risks, and multiple exchanges continue to weigh heavily on the local currency”, he lamented.

Experts believe that since almost 70 per cent of the country’s imports come from China and Asia , while only about 12 per cent come from USA, ‘why then must we use Dollars to transact business with China at (then) more than N360 per $1 instead of N56.42 to the Yuan?’

Going by this rate, Yuan is about 642 per cent, or more than six times cheaper than the dollar at the foreign exchange (forex) market. The CBN, in July 2018 circular by its Director, Financial Markets Department, Dr. Alvan Ikoku, announced plans to start bi-weekly auctions of the Chinese yuan, which is a maximum of 15 billion Renminbi or N720 billion with a three-year tenor. Four banks, First Bank of Nigeria Limited, Stanbic IBTC, Standard Chartered Bank (SCB) and Zenith Bank Plc were earlier appointed as the settlement banks for the deal. And for any authorised banks to access the bi-weekly auction of the Chinese currency, such dealers “shall open Renminbi accounts with a correspondent bank and furnish the CBN with its Renminbi account details which may either be with a bank onshore or offshore China”.

[Sun]

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