Nigeria swap deal shows renminbi’s African rise

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By:
Kanika Saigal
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Following in the footsteps of Egypt and South Africa, Nigeria has signed up for a currency swap deal with China, but are swaps all they are cracked up to be?

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Nigeria’s signing of a new currency swap deal with China will boost financial stability and promote broader African-Chinese economic cooperation, according to analysts. Nigeria is the third African country to sign a swap deal with China, after Egypt and South Africa.

“By reducing the dollar component of trade settlements between Nigeria and China, the cost of doing business between the two countries will fall and the naira should strengthen,” says Linus Iwuajoku, head of enterprise intelligence at Diamond Bank, a Nigerian commercial bank. “Trade flows between Nigeria and China will also increase, sending a positive message to traders and investors looking to do business in Nigeria.”

Under the terms of the swap signed in May this year, the central banks will exchange N720 billion ($2 billion) and Rmb15 billion ($2.2 billion) over three years. Initial plans for a swap began in 2011 when Sanusi Lamido Sanusi was governor of the Central Bank of Nigeria. Following the drop in the crude oil price in 2014, dollars became scarce and plans for the swap were re-visited in 2016 by Sanusi’s successor, governor Godwin Emefiele.

However, there has been some scepticism about how the deal will benefit Nigeria, given the large trade imbalance between the two countries. Data from the National Bureau of Statistics of Nigeria shows that, in 2017, China accounted for 19%, or N1.79 trillion, of Nigeria’s total imports. During the same period, exports to China were valued at N220.57 billion or 2% of Nigeria’s total export trade of N13.6 trillion.

“We have been referring to the currency swap as ‘much ado about nothing’,” says Robert Omotunde, head of investment research at Afrinvest Securities, a Nigerian investment bank.

“Even if Nigeria was able to make use of the entire $2.4 billion in one year, the value is still less than 50% of Nigeria’s total imports from China, which will do very little to swing trade in Nigeria’s favour,” says Omotunde. “By our calculations, the net impact on foreign exchange demand will be less than 1%, so the currency swap will not reduce pressure on foreign exchange reserves. Dollars will remain a necessary component to trade.”

Reserves

Foreign exchange reserves in Nigeria have strengthened due to a number of policy changes introduced by the CBN, including bans on a number of imports and removing the dollar peg in 2016, while a rebound in crude oil prices has also boosted reserves.

In August, the CBN’s reserves amounted to $46.7 billion, up from $27.3 billion in January 2017. Nevertheless, the impact of dollar scarcity over time has created a burgeoning black market: officially, the naira is trading at N305 to the dollar, while on the parallel market the rate is closer to N360.

“Given the enormous increase in reserves over the past 18 months, it is assumed that the swap lines are significantly smaller as a size of total reserves than they have been in the past,” says Christopher Dielmann, senior economist at Exotix.

However, at least it is a step in the right direction.

Sarah Baynton-Glen, economist at Standard Chartered, says: “The swap may not be huge, but it shows commitment to strengthen ties on both sides. More bilateral deals will come, and there has even been some talk around a panda bond, although we think this is less likely in the near term.”

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Phumelele Mbiyo,
Standard Bank

Despite the limitations of Nigeria and China’s swap, other African countries will follow in Nigeria’s footsteps, says Phumelele Mbiyo, head of Africa research at Standard Bank, based in Johannesburg.

“This is partly because of China’s dominance in the continent in terms of trade and investment,” says Mbiyo, “but also because China is actively pushing forward with the internationalization of the renminbi. This is China’s agenda, but the hope is that it will benefit Nigeria and, eventually, the rest of Africa.”

As with Nigeria, Chinese trade with Africa as a whole has been steadily increasing since 2000. China has deployed capital to Africa to fund projects in mining, real estate, energy, infrastructure, agriculture and telecommunications.

China has invested in 293 projects in Africa since 2005, totalling $66.4 billion and creating 130,750 jobs, according to EY’s Africa Attractiveness Survey published in 2017. South Africa imports the most Chinese goods in Africa, followed by Egypt and Nigeria.

China’s relationship with Africa was bolstered following the creation of the China-Africa Inter Bank Association in September, when China Development Bank signed an agreement with 16 African banks across the continent. The aim is to support African countries and further plug the funding gap in terms of infrastructure development and industrialization, among other things.

With the inclusion of the renminbi into the Special Drawing Rights basket of the IMF in 2016, African countries are becoming more interested in including renminbi in their central bank reserves. Along with Nigeria, Ghana, Tanzania, South Africa and Zimbabwe already include the renminbi in their reserves.

Today, 79% of Nigeria’s total reserves are denominated in dollars and 8% in renminbi. The remainder is in euros, Swiss francs and sterling. The CBN’s target is to hold at least 10% of total foreign exchange reserves in renminbi.