Home News Everything You Need to Know about Currency Swap between Nigeria, China

Everything You Need to Know about Currency Swap between Nigeria, China

SHARE

Everything You Need to Know about Currency Swap between Nigeria, China

Since the currency swap deal was announced by the Central Bank of Nigeria (CBN) on May 3, Nigerians have been going back on forth on conjectures about what the new policy holds for them and the country’s economy.

Even before the framework detailing the operational guidelines of the deal finally released, speculations have been rife on its possible impact or otherwise on Nigeria.

Under the bilateral currency swap agreement, the Peoples Bank of China (PBC) will receive about 16 billion Chinese Renminbi (RMB), while the Central Bank of Nigeria (CBN) will give about $2.5 billion.

CBN governor, Godwin Emefiele, said the funds would provide adequate local currency liquidity to Nigerian and Chinese industrialists to carry on their businesses.

Also, the currency swap would assist other local businesses by reducing the difficulties they encounter in the search for currencies in their business transactions.

Mr. Emefiele said the primary benefit would be to boost local currency liquidity in the Nigerian economy.

Already, Standard Chartered Bank has been selected as the settlement bank, Stanbic IBTC Bank, which has an affiliation with Investment & Commercial Bank of China (ICBC), will serve as the correspondent bank at the China end for the swap deal.

According to the CBN governor, the deal would make Naira available to Chinese businesses. In return, the supply of Chinese currency (RMB) would be guaranteed for their Nigerian counterparts, to boost speed, convenience, and volume of transactions between the two countries.

CBN spokesperson, Isaac Okoroafor, said the swap arrangement would make it easier for most Nigerian manufacturers, especially small and medium enterprises (SMEs) and cottage industries in manufacturing and export businesses, to thrive.

Mr. Okoroafor said the area the new arrangement would be most useful would be for the importation of raw materials, spare parts and simple machinery for businesses.

“Those categories of businesses will take advantage of available RMB liquidity from Nigerian banks under the swap deal to pursue their businesses without being exposed to the hassles of seeking other scarce foreign currencies, which attract higher interest rate charges,” the CBN spokesperson said.

“Indeed, the deal will protect Nigerian business people from the harsh effects of third currency fluctuations,” he added.

Mr. Okoroafor said the deal, which is purely an exchange of currencies, would also make it easier for Chinese manufacturers seeking raw materials from Nigeria to obtain Naira from banks in China to pay for imports from Nigeria.

At the end of the Monetary Policy Committee (MPC) meeting in Abuja last week, the CBN governor again shed more light on how the currency swap would work after the release of its operational framework.

According to him, the swap would work in the same way as normal transactions involving the issuance of letters of credit (LCs).

An LC is a document from a bank to provide guarantee a businessman has the capacity to pay for goods and services ordered. A document is a form of security for people buying or selling various goods and services.

It assures the seller that if a buyer of his good or service fails to pay, the bank that issued the LC will pay on his behalf, in addition to all other requirements spelled out in the document in the letter in respect of the transaction.

The LC could also provide protection to buyers of goods and services; that they are capable of paying for certain products or services, or they are guaranteed to get their money back if the seller fails to deliver.

For instance, if a manufacturer of goods or provider of service receives an order from a new customer abroad, he may not have any knowledge about the ability of the customer to pay for the order.

To limit the risk of delivering the goods or services and not get paid, the seller or provider of service demands an LC issued by a certified bank, guaranteeing to pay up if any party fails.

In practice, there are lots of contractors and other categories of businessmen who go about with several Local Purchase Orders (LPOs) looking for banks to finance them.

In the course of seeking loans to execute those LPOs, they end up paying huge interest rates that eat up the funding, leaving the job undone.

In recent times, scores of Chinese contracting firms and businesses have come to Nigeria to do business. They exist in different sectors of the economy. Some came to trade, engage in agriculture and other businesses.

With the significant presence of Chinese firms in the Nigerian economy in recent times, most of the companies executing various multi-billion dollars infrastructural projects for Nigeria have had to struggle with serious funding constraints to complete them.

Deputy Chinese Ambassador to Nigeria, Lin Jing, said Nigeria is Chinese biggest investment destination in Africa as well as the second largest export market and the third largest trading partner to China in Africa.

Most of these contracts, including railways systems, roads, power, water, hospitals, petrochemical plants, airport terminals as well as projects in the oil and gas sector are financed through various counterpart funding arrangements between the Nigerian and Chinese governments.

Some of these contracts have been stalled or frustrated into abandonment by lack of funding.

Relying on local banks for loan support has proved largely unsustainable. Contractors are made to pay as high as 26 to 30 percent in interest on loans. The high cost of government contracts is directly attributable to high-cost funding of such contracts.

The swap deal is one of the strategies adopted by the Federal Government to overcome the stress and frustrations encountered by businesses in getting financing for contracts and trade deals through local commercial banks.

Under the swap arrangement, contractors or businesses with genuine contract award documents can approach any of the accredited banks to request for credit facilities to execute the contract under terms and conditions to be spelled out in the approved guidelines.

Although details of the interest rate and other conditions required by prospective businesses to qualify for the credit facility are yet to be unveiled by the CBN, those familiar with the deal say at the expiration of the contract, the CBN would refund the RMB, while the PBC would refund the Naira at pre-determined exchange rates.

An analysis by a credit rating, finance and economics agency, Bode Agusto & Co., said the N900 billion to be received by PCB under the swap deal would increase its Naira assets base while cutting its RMB savings by the equivalent amount.

The Chinese government would then utilize the funds to give out loans to interested Chinese businesses in Nigeria at concessional interest rates (usually single digits) to enable them carry out their contractual and trade obligations.

This arrangement would not only boost the competitiveness of Chinese businesses in Nigeria, it would equally deepen their operations in the country.

The arrangement would not only eliminate threats of abandoned projects due to funding challenges, it would boost the capacity to provide critical infrastructure that increases growth in key sectors of the economy, enhance productivity and accelerate job creation efforts.

According to the analysis, on the settlement maturity date, the PBC would either repay the CBN from the profits generated by Chinese businesses in Nigeria to whom the funds were loaned or trade RMB or dollars for Naira. PBC could borrow Naira from the Nigerian financial market.

This will continue to service a pool of funds available for other Chinese businesses in Nigeria to borrow from.

The CBN governor said the swap deal was executed after almost two and a half years of rigorous negotiations with the PBC primarily to boost trade relations between Nigeria and China.

“There are some importers from, say, England, that would be given invoices in Pound Sterling if they want to import goods from England, or invoices in Euro against the dollar if they want to import from Europe.

“Under the China-Nigeria swap deal, Nigerians will begin to see Chinese suppliers, based on negotiations with Nigerian importers, issuing invoices in Renminbi (RMB) (Chinese currency) and executing contracts in the same currency.”

With China controlling almost about 35 percent market share, the CBN governor said the country is Nigeria’s largest trading partner at the moment.

By the time the operational framework for the current swap is published by the CBN, he said Nigerians would begin to see invoices in Chinese currency, rather than the traditional dollar.

The direct impact would be that all those businesses involving the Chinese that Nigerians could not do because of lack of access to Chinese currency would become possible with swap deal. One can then imagine the exponential impact on the economy.

“Overall, it is going to be positive for Nigerian imports and for Nigerian businesses. By the time the swap deal becomes operational, Nigeria will become the trading hub in the West African sub-region. It can never, never be negative to Nigeria,” the CBN governor said.

So far, he said apart from Nigeria, only two other countries in Africa are currently enjoying the currency the swap deal with China. The other countries are South Africa and Egypt, two of Africa’s biggest economies after Nigeria.

In 2017, the International Monetary Fund IMF’s World Economic Outlook ranked the three countries among the biggest economies in Africa with gross domestic products (GDP) put at $415.08 billion (Nigeria), $330.159 (Egypt) and $280.36 billion (South Africa).

The World Bank in its latest projections said the three countries would lead sub-Saharan Africa’s economic growth projected to reach 3.1 percent in 2018, and an average of 3.6 percent between 2019 and 2020.

Therefore, analysts say the currency swap deal hold bright prospects to grow the economy and continue to keep Nigeria ahead of others as the leading economy in Africa.


Source :Premium Times

Reactions
  • gbam!! (0)
  • Interesting (0)
  • funny (0)
  • cool (0)
  • nawaoooo (0)
SHARE
Entrepreneurs, Job-Seekers and the Business Minded. Business & Finance News 247.

Add a Comment

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.