The Central Bank of Nigeria (CBN) in 2011 made a decision to hold a part of its external reserves in Chinese Renminbi (CNY). The reason for this is not far-fetched given the expanding influence of China in global trade and the rate at which Nigeria imports from China. Statistically, bilateral trade between Nigeria stood at about US414.7 billion as at the end of 2016 and as at 2017q4, China accounts for up to 22% of the merchandise imports of Nigeria.
It is against this backdrop that the Central Bank of Nigeria (CBN) undertook a Bilateral Currency Swap Agreement (BCSA) with the People’s Bank of China (PBoC). This agreement was finally signed on Friday, 27 April 2018 making Nigeria the 3rd African country to have a Currency Swap Agreement with the People’s Bank of China.
HIGHLIGHTS OF THE AGREEMENT
- This agreement is valid for an initial term of three years. This term can be mutually extended by both parties.
- Essentially, the agreement makes a certain amount of naira available to the People’s Bank of China (PBoC) and a certain amount of Renminbi available to the Central Bank of Nigeria(CBN)
- Based on this agreement, parties will swap CNY15 billion for NGN720 billion.
- The CBN haven received the Renminbi then makes it available to Nigerian Banks who will proceed to open Renminbi Letters of Credit (LC) for Nigerians desirous of importing from China.
- The effect of this is that Nigerians who are importing from China will have the opportunity of paying their Chinese suppliers in Renminbi and the Chinese importers from Nigeria can now pay in Naira as well.
- Basically, this creates an extra option (Renminbi-denominated transactions) for trade transactions as opposed to the current exclusive use of US Dollars being the intermediary currency.
- This move is expected to reduce the pressure on the naira-dollar exchange rate.
HOW WILL THE SWAP OPERATE?
Firstly, authorised dealers (who for this purpose are deposit money banks and merchant banks) shall open Renminbi accounts with a correspondent bank in China (onshore or offshore) and provide their Renminbi Account details to the CBN.
The CBN is to hold FX auctions bi-weekly (once in two weeks) where Nigerians who import from China can purchase the Renminbi. The bidding will be submitted by the authorized dealers on their behalf.
The exchange rate will be dependent on the forces of demand and supply and will be determined after the auction. Most importantly, only trade-backed transactions will be considered for Renminbi Sales under this window.
This window does not preclude importers and exporters from paying the applicable levies on imports and exports. They will continue to pay the requisite import and export levies.
It is noteworthy that the arrangement under this window won’t be involving cash so authorized dealers will not be opening Renminbi denominated domiciliary accounts for customers neither will the use of debit cards be applicable.
It is also noteworthy that FX purchased in this window cannot be used for trade transactions that do not originate from China.
HOW CAN NIGERIAN IMPORTERS BENEFIT FROM THIS WINDOW?
The BCSA is a commendable move by the CBN that promises to benefit Nigerian importers from China immensely. To make the best use of this window, the following steps should be followed:
- Importers shall source for vendors/suppliers in China and obtain an invoice from them denominated in Renminbi.
- Importers shall secure all necessary regulatory documentation and open a “Form M” in Renminbi(CNY) as against the former practice of opening the “Form M” in USD.
- Importers shall make a request for an authorized dealer to make a bid on their behalf at the CBN bi-weekly FX auction.
- The CBN shall then debit the current account of the authorized dealers with the naira equivalent of the Renminbi bid Request which they have placed on behalf of their importer customers on the day of intervention.
HOW CAN NIGERIA BENEFIT FROM THE BCSA?
Basically, the BCSA will grant Nigerian importers direct access to Renminbi while Chinese importers will also enjoy direct access to Naira without an intermediate conversion to USD. In essence, as opposed to the usual way of first exchanging Naira for the dollar before changing it again to Renminbi when Nigerians import merchandise thereby putting pressure on the Naira, Naira will be directly swapped with the Renminbi. As a result of this, it is expected that the demand for the USD will reduce thereby reducing the pressure on the naira-dollar exchange rate.
Also, it is expected that the BCSA would boost Nigeria’s exports to China since Chinese importers will now enjoy direct access to the Naira. Some of the products Nigeria already exports to China are cassava products as well as leather, hides and skin. Nigeria is currently in a trade deficit with China and an increase in our exports to China will be instrumental in addressing the imbalance.
The BCSA will also effectively aid the convenience, speed, volume of trade transactions between Nigeria and China. Consequently, it is expected that Chinese investors will be encouraged to set up industries in Nigeria to minimize their cost of shipping and transportation. This will contribute greatly to the industrialization of the country and also create jobs for Nigerians.
Finally by eliminating the intermediary currency, the associated costs and opportunity costs attached to importing from China will reduce thereby affecting the price of goods and services in the country, and domestic inflation.
CONCERNS ABOUT THE BCSA
One major concern of Nigerians is the possibility of the BCSA turning Nigeria to a dump site for China. It is important to note that the 41 items banned for foreign exchange contained in the 2015 CBN circular remains banned under the BCSA window. Some of the items are toothpick, rice, cement, cosmetics, textiles. These items were banned for foreign exchange to promote their local production, resuscitate domestic industries and improve employment. In the light of this, the issue of dumping goods in Nigeria might not be a genuine concern as the BCSA window does not in any way increase the scope of items that can be imported with foreign exchange.
Another major concern is the possibility of an increased trade deficit with China. As it is, Nigerians seem to be more interested in importing from China than exporting to China. The BCSA will further boost imports from China. The effect of this is an increased trade deficit with China. Economists generally agree that as the demand for imports rises as compared to the demand for exports, the currency will decline. Where one of the major purposes of the BCSA is to boost the Nigerian Naira, it becomes necessary to question the essence of the agreement as a whole. This might be a genuine concern.
The BCSA window is a commendable move by the CBN. If properly implemented by the CBN and effectively utilized by importers, this window might just be a policy that will successfully reduce the pressure on the naira exchange rate, reduce the influence of the third currency transaction (USD) while easing trade transactions between Nigeria and China. Most importantly, the government should not only focus on imports but also largely on exports so that there will be a balance of trade between Nigeria and China.
The implementation of the BCSA is set to commence when adequate sensitization of the new window has been carried out in the major parts of the country. Importers who are desirous of benefitting from this window are advised to from now make requests for Renminbi(CNY) denominated invoices from their Chinese suppliers and open their “Form M” in Renminbi as conversion of a “Form M” opened in USD to Renminbi(CNY) might not be feasible.