Nigeria-China currency exchange collapses

Through Omodele Adigun and Uche Usim, (Abouja)

Three years after the Central Bank of Nigeria (CBN) signed a currency swap deal with the People’s Bank of China (PBoC), Nigerians have yet to feel the impact of this deal, especially that the free fall of the naira, which currently stands at 570 N / $ 1 on the parallel market, persists.

In April 2018, the CBN published the settlement of a US $ 2.5 billion currency swap agreement in June of the same year; aimed at facilitating trade between the two countries and improving the management of foreign exchange reserves.

But tongues have already started claiming that the N720 billion naira for at least 15 billion yuan (renminbi) swap deal (the equivalent of $ 2.4 billion as of June 2018) between the two countries no has not achieved its goal since it was sealed.

The Bilateral Currency Exchange Agreement (BCS) was inspired by trade facilitation. This was to allow importers of goods from China to conclude their transactions in Yuan instead of US Dollar) and vice versa. This was done to reduce the demand for US dollars, removing undue pressure on the naira at the time, in line with the CBN naira management strategies.

As the CBN continued to implement the BCS with the People’s Bank of China through bimonthly renminbi auctions, it was found that bureaucratic bottlenecks have become a major challenge for traders and importers. doing business with China.

According to CBN’s financial markets activity report for the first half of 2020, CNY 1,746.40 million has been sold since its inception until the end of June 2020, or 89.12 billion naira using CNY / N51, 03. as the conversion rate (from June 2020).

Prior to the deal, the CBN had been in talks with China over the deal for more than two years. Nigeria is the third African country (after South Africa and Egypt) to sign a currency swap agreement with China. The agreement was to allow the two countries to exchange a total of 15 billion yuan (renminbi) for 720 billion naira or vice versa for three years and would be extended by mutual consent, for the purposes of trade finance and direct investment between the People’s Republic of China and the Federal Government of Nigeria and maintain the stability of financial markets.

Following the implementation of the initiative, the value of the national currency also responded to the news, among other factors. The Naira was selling at 48.6 N / CNY in January 2018 before the announcement, it appreciated 494 basis points (4.94%) after the deal was signed and announced. It further appreciated by + 8.23% at the end of the year (2018).

In December 2020, the Naira against the Chinese Yuan had depreciated by -30.27% compared to the gains recorded in 2018, this can be attributed to the demand for the Yuan as the US dollar became even more expensive for trade transactions, greater awareness of swap dealing with China by traders and adjustment of the naira by the CBN during the period. However, CBN has not released data showing how much renminbi has been sold between July 2020 and today.

Proshare analysts expected the naira to depreciate further against the yuan, as converting directly to Chinese currency for transactions in China would be cheaper than converting to US dollar and then converting to yuan for the ‘import / trade. However, unnecessary delays, bureaucracy, and corporate bottlenecks in accessing the renminbi have been the experience of most traders involved in business transactions with Chinese companies.

In 2018, imports from China accounted for 25.12% of the country’s total imports, while China was not among the top ten (10) export destinations for Nigerian products. There was a drop in 2019 to 20.49%, which defied analysts’ expectations, as goods from China are expected to be cheaper as a result of the currency swap deal, thus increasing our imports from the country.

There was a rebound in 2020 that continued into the first quarter of 2021, accounting for 29.34% of total imports to Nigeria. Our export position with Nigeria also increased, accounting for 4.91% and 6.5% of total exports in 2020 and the first quarter of 2021 respectively.

The swap deal had the potential to improve the country’s foreign exchange position 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 turned out to be an exception, another failed policy.

The target of N720bn to 15bn Renminbi to be traded in three years has not been reached, traders and importers still owe the US dollar, then the Yuan for commercial transactions with Chinese companies, which is expensive causing a constant rise in commodity prices. imported from China, as the cost of operations is passed on to end consumers, resulting in higher inflation. In addition, the value of the Naira against the US dollar continues to depreciate (selling at N570 / USD in 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 great hopes of saving the local currency, did not was sabotaged by a regressive economy. forces, says an analyst.

According to Lukman Otunuga, senior analyst at FXTM, the deal fell short of its target three years after its launch, as the same destructive forces sabotaging the Naira still remain present. “A terrible combination of dollar shortage, inflationary pressures, weak macroeconomic conditions, exposure to external risks and multiple trade continues to weigh heavily on the local currency,” he lamented.

Experts estimate that since nearly 70 percent of the country’s imports come from China and Asia, while only about 12 percent come from the United States, “why then do we have to use dollars to do business with China at (then) over N 360 for $ 1? from N56.42 to the Yuan? ‘

At this rate, the yuan is about 642%, which is more than six times cheaper than the dollar in the foreign exchange market (forex). The CBN, in the July 2018 circular from its director of the financial markets department, Dr Alvan Ikoku, announced its intention to launch bi-weekly auctions of the Chinese yuan, which amounts to a maximum of 15 billion renminbi or 720 billion naira with a term of three years. . Four banks, First Bank of Nigeria Limited, Stanbic IBTC, Standard Chartered Bank (SCB) and Zenith Bank Plc were previously designated as settlement banks for the transaction. And in order for all authorized banks to access the bi-weekly Chinese currency auction, these brokers “must open renminbi accounts with a correspondent bank and provide the CBN with its renminbi account details which can be with an onshore or offshore bank in China ”.

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