CBN’s CNY1.2b interventions and forex developments

Averts over $178m spot pressure on reserves, exchange rate

(FILES) This file photo taken on August 8, 2018 shows bundles of 100 yuan (14.6 USD) notes at a bank in Shanghai. (Photo by Johannes EISELE / AFP)

The week-long visit of President Muhammadu Buhari to the People’s Republic of China between April 11 and 15, 2016, was alongside the Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, in a last push to secure a three-year Bilateral Currency Swap Agreement worth CNY15 billion (N720 Billion), among other things.

On June 6, 2018, CBN issued the Regulations for Transactions with Authorised Dealers in Renminbi, which provided the framework for implementations. The apex bank and the People’s Bank of China executed the Currency Swap Agreement on behalf of their respective countries.

From July 27, 2018, when the first intervention under the Naira-Yuan Swap deal was executed, till date, the Central Bank of Nigeria (CBN) has put in an estimated CNY1.185 billion.

The interventions, during the 12-month period, done at various exchange rates, ranging from N48 to N58 per CNY, at an average of N54/CNY, had been estimated at N64.02 billion.

On the other hand, the above values, when converted at an average dollar exchange rate at N360 per dollar, amounts to $177.8 million. This amount, however, represents “spot” pressure that would have affected the reserves and exchange rate, but averted by the initiative.

So far, the interventions on the N720 billion three-year swap deal are still below 10 per cent of the total value after one year of operations, an indication that the CBN-driven bilateral intervention has more to offer to Nigerian businesses with interest in China.

Beside the fact that the opening of the futures window provided the opportunity for most importers to quote dollar exchange rate ahead, as opposed to spot purchase, the swap deal opened up new window for the management of the country’s reserve without immediate depletion of the value, while importers’ financial transactions would be facilitated easily.

The move thus became imperative given burgeoning bilateral deals and the challenge of converting to dollar before consummating transactions, that is, removing the need to first source the dollars before payments for transactions involving Yuan and Naira.

The apex bank had indicated at the commencement of the intervention that the sales shall be through a combination of spot and short-tenored forwards and shall be a Special Secondary Market Intervention Sales (SMIS) retail, dedicated to the payment of Renminbi denominated Letters of Credit for raw materials and machinery and agriculture.

The bank’s spokesman, Isaac Okorafor, had explained that due to the peculiarity of the exercise, CBN would not be applying the relevant provisions of its Revised Guidelines for the Operation of the Inter-bank Foreign Exchange Market, which direct all SMIS bids to be submitted to the CBN through the Forex Primary Dealers (FXPDs).

He also said the CBN would also not be applying the relevant provisions of the Guidelines which equally provide that “Spot FX sold to any particular end-user shall not exceed one per cent of the overall available funds on offer at each SMIS session”.

Okorafor further explained that there would be no predetermined spread on the sale of forwards by authorised dealers to end-users under the Special SMIS-Retail, adding that authorised dealers would be allowed to earn 50 kobo on the customers’ bids.

It was purposely executed to finance trade and investment between China and Nigeria; maintain financial market stability; and facilitate other connected purposes as may be agreed upon by both countries.

The deal created a platform that provides Naira liquidity to Chinese companies and investors looking to do business with Nigeria on the one hand; and provides Chinese Yuan liquidity to Nigerian companies and investors looking to do business with China on the other hand.

Available data showed that between 2013 and February 2016, Nigeria received $213.4 million worth of capital inflows from Mainland China, just 0.4 per cent of $52.4 billion total capital importation into Nigeria within the period, ranking as the 18th largest source of foreign capital inflows into Nigeria.

Including the autonomous region of Hong Kong, total capital flows from China was $484.2 million within the period, still less than one per cent of total capital importation into Nigeria.

On the other hand, trade relations have been rising with merchandise trade between the two countries estimated at $30.6 billion between 2013 and 2015, 8.5 per cent of Nigeria’s total merchandise trade.

The Balance of Trade was however, heavily tilted in favour of China as import from China was 7.8x Nigeria’s export ($3.5 billion) within the period and China remains one of the few trading partners of Nigeria.

By 2016, CBN had built up stock of external reserves denominated in Yuan from $101.3 million in 2011 to $2.2 billion, representing 7.5 per cent of gross reserves.

Currently, imports by country of origin as at first quarter of 2019, showed that Nigeria imported goods worth N979.3 billion or 26.44 per cent from China. Unfortunately, Nigeria’s export to China pales into insignificance compared to the import.

A technology and agriculture equipment dealer at the popular Computer Village in Lagos State, Allen Williams, told The Telegraph that the parent company has benefitted from the swap deal.

“Basically, all we do in recent times is to bid and we have always been successful. Since we do a legal business, we submit our details and our Letters of Credit are approved. The truth is that it has reduced a lot of stress for the company in running around for dollars,” he said.

Specifically, China emerged Nigeria’s major trading partner in terms of import, with items cutting across laboratory, hygienic or pharmaceutical glass ware; motorcycles and cycles; machines for reception, conversion and transmission or regeneration of voice and images.

An economists and importer, Tony Nwaka, said while the currency deal with China is not an effective substitute for appropriate fiscal and monetary policy flexibility in adapting to the lower crude oil prices environment, it is still a positive development that has reduced cost of transaction with Nigeria’s largest trading partner and also ease the immediate foreign currency challenges associated with Nigeria’s negative terms of trade.

Of course, there were concerns at beginning of the deals, Ucha Nwagbo, an economist, noted. “Key risks was the ease of transaction with a highly competitive country like China, which could worsen Nigeria’s trade balance and weaken domestic manufacturing capacity. Yes, the concern was justified and further emphasizes the need to deepen domestic policies on improving competitiveness. Chinese products are everywhere today, both good and bad.

“In any case, it is not bad compared to the level of distortions that would have arisen at the foreign exchange market in the last one year, if the deal was not in place for importers.”

There were initial fears over the deal with China, a country which political ideology swings on almost equal proportion between capitalism and state control, especially when the terms of the deal appeared to be classified. There were questions about how the swap will be exchanged- crude oil or reserves.

An industrialist, Mazi Sam Ohuabunwa, in a monitored programme, had feared that the optimism greeting the Nigeria-China deals may pale into nothing, if the negotiators fail in the contents and terms of the agreement, especially, knowing that antecedents of similar deals on other African countries have not been totally progressive.

Indeed, if Nigeria buys Chinese goods, it would make business sense to use the Yuan, because there is a lot of squeeze for the dollar.

The Chief Consultant of Lagos-based B. Adedipe Associates, Dr. Biodun Adedipe, said that the Naira/Yuan conversion deal has the prospects of shoring up the fortunes of the nation’s currency in the foreign exchange market.

He was optimistic that the initiative would ease trading transactions.

By investors in both countries, as the ordeal of converting the two currencies, first to dollar would cease, giving exchange value advantage to the traders.

The Association of Bureaux De Change Operators of Nigeria (ABCON) said the $2.5 billion currency swap agreement is a positive development that will promote naira’s sovereignty in Africa.

ABCON President, Alhaji Aminu Gwadabe, said the admittance of Yuan into the basket of International Monetary Fund (IMF) currencies signaled a positive direction for the deal and called for the inclusion of licensed BDC operators.

He also urged the CBN to consider diversifying dollar disbursements to BDCs with percentage amount of Yuan to meet the critical needs of their numerous clients travelling to China for personal and business purposes.

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