Last week, during President Muhamadu Buhari’s visit to Beijing, China, the Central Bank of Nigeria signed a currency swap deal with the Industrial and Commercial Bank of China Limited (ICBC), the world’s biggest bank by assets which is owned by the Chinese government lender.
The deal which was reached following a meeting between Buhari and Chinese President Xi Jinping, according to the director general of the African affairs department of China’s foreign ministry, Lin Songtian, 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.
With this, Nigeria becomes the 32nd country to sign a currency swap deal with China even though the Asian giant is Nigeria’s biggest import trade partner. In 2014, China accounted for 31.85 per cent of the $46.53 billion import bill of Nigeria with $10.2 billion import bill.
However, China is not in the top 10 export partners making the Yuan not readily available for Nigerian traders who wants to import from China. Instead, they convert the naira to United States dollars before converting it to yuan.
What then is currency swap? According to Investopedia, currency swap involves the exchange of principal and interest in one currency for the same in another currency. Simply put, it is the exchange of one currency for another at a specific rate of exchange.
It is an attempt to facilitate increased trade between two countries as well as offer a means of minimising foreign borrowing costs. Nigeria’s finance minister Kemi Adeosun had earlier revealed that Nigeria was looking at panda bonds – yuan-denominated bonds sold by overseas entities on the mainland -saying they that would be cheaper than Eurobonds.
The CBN said it plans to diversify its foreign exchange reserves away from the dollar by switching a stockpile into yuan, having converted up to a tenth of its reserves into yuan five years ago.
In 2011, under the governor of the Central Bank of Nigeria at the time, Sanusi Lamido Sanusi, a small percentage of the country’s foreign reserves were in the Chinese Yuan. At the time, Nigeria’s $32 billion in reserves were 79 percent in dollars with the rest largely held in Euros and Swiss francs.
Sanusi was cited saying the decision came because the Nigerian financial sector had a lot of confidence in the Chinese currency. “Confidence in China doesn’t mean lack of confidence in America. Europe and America will continue to be important parts of the world. Having said that, it will be almost living in a dream world to ignore China. It’s the second-largest economy in the world and it’s well managed,” Sanusi said.
In 2014, Central Bank’s deputy governor, Kingsley Moghalu, said the bank was looking to increase the percentage of Yuan foreign reserves in its possession from two per cent to seven per cent.
According to him, 85 percent of its foreign reserves were in dollars and it needed to have more in Chinese Yuan, as the country was taking a more important place in global trade. “It was clear to us that the future of international economics and trade will shift in large part to business with and by China. Ultimately the renminbi (Yuan) is likely to become a global convertible currency,” Moghalu said.
China’s official Xinhua news agency had cited President Xi as telling Buhari that there was huge potential for economic cooperation, naming oil refining and mining. Nigeria’s president was also quoted as affirming the willingness of both countries to work together in the areas of agriculture, fishing and the manufacturing of cars, construction materials and textiles. This is expected to boost trade, thereby the essence of the currency swap
The Chinese have been entering into these swap agreements with various countries on a country by country basis. The swaps typically last for three years after which they are renewed or increased. For example, in 2012, the United Kingdom signed a swap agreement for Y200 billion with China. Last year, it was extended and increased to Y350 billion.
There is already direct trade with the dollar, euro, yen, pound, the Australian Aussie, the New Zealand dollar, Russia’s rouble, Swiss francs, the Singaporean dollar and the Malaysian ringgit.
The Naira will be the latest in a string of currencies which currently trade with the Yuan, and by joining the list of these countries, Nigeria is expressing its desire to take China seriously as a global economy and directly take on the benefits that come with that.
Lin said a framework on currency swaps has been agreed with Nigeria, making it easier to settle trade deals in yuan. With the currency swap deal, the CBN will have yuan which it can then sell to Nigerian banks in the same way it sells dollars. Consequently, the Nigerian trader can then tell his Chinese trading partner to give him a quote in Yuan instead of dollars.
Once he has the Yuan quote, the trader can then go to a Nigerian bank and make a request for Yuan in the same way he used to make requests for dollars. Instead of dealing with three currencies, the dollar element is removed and there is a normal two way quote.
This takes off some of the dollar demand pressure as people who want to import goods and services from China can purchase Yuan directly while those paying for goods and services in dollar make their dollar demand.
Analysts see the currency swap deal with China as a sort of relief for the country, particularly the external reserves which has continued to decline due the dollar demand pressure.
They believe the swap will help shore up the reserves which in turn will boost confidence in the naira and increase its market value.