The Central Bank of Nigeria (CBN) and Peoples Bank of China (PBoC) have begun the execution of a $2.5 billion (Renminbi 16 billion) bilateral currency swap agreement entered into over two years ago.
CBN Governor Godwin Emefiele led some CBN officials to the signing ceremony in Beijing, China. His PBoC counterpart Yi Gang headed the Chinese team. The pact was the result of over two years negotiations between both banks.
The transaction is aimed at providing adequate local currency liquidity for Nigerian and Chinese industrialists and other businesses in order to reduce their difficulties in the search for a third currency.
In a statement, CBN Acting Director, Corporate Communications Isaac Okorafor explained that Chinese businesses would get naira liquidity and Nigerian businesses, RMB liquidity under the agreement.
This, he said, would improve the speed, convenience and volume of transactions between both countries. It will also assist both countries in their foreign exchange reserves management, enhance financial stability and promote broader economic cooperation between them.
It will also be easier for Nigerian manufacturers, especially small and medium enterprises (SMEs) and cottage industries to import raw materials, spare-parts and machines. To facilitate their imports, they can get RMB facility from Nigerian banks without being exposed to the difficulties of seeking other scarce foreign currencies.
The deal, which is purely an exchange of currencies, will also make it easier for Chinese manufacturers seeking to buy raw materials from Nigeria to obtain naira from Chinese banks to pay for their imports.
The pact will protect Nigerian businesses from the harsh effects of third currency fluctuations.
Nigeria is the third African country to have this kind of agreement with the PBoC. Nigerian and Chinese officials expressed delight at the signing of the agreement and expressed hope that it would boost mutually beneficial business transactions between their countries.
The agreement will allow both sides to swap a total of 15 billion Chinese yuan ($2.35 billion) for N720 billion, or vice versa, in the next three years, PBoC said on its website.
The move is aimed at facilitating bilateral trade and investment and promoting the financial stability of both countries, the PBoC said. The deal can be extended by mutual consent.
A currency swap deal allows two institutions to exchange payments in one currency for equivalent amounts in order to facilitate bilateral trade settlements and provide liquidity support to financial markets.
The News Agency of Nigeria (NAN) reports that in 2014, then CBN deputy governor, Kingsley Moghalu, said the bank was looking into increasing the percentage of Yuan foreign reserves in its possession from two to seven per cent.
According to him, 85 per cent of the CBN’s foreign reserves were in dollars and it needed to have more in Chinese Yuan, as the country was taking a more important place in global trade.
“It was clear to us that the future of international economics and trade will shift in large part to business with and by China. Ultimately the renminbi (Yuan) is likely to become a global convertible currency,” Moghalu said.
Since 2014, the world market has recognised the Yuan as a likely global reserve currency, a replacement for the dollar, which has led countries like Ghana, South Africa and Zimbabwe to integrate the renminbi (Yuan) into their financial markets.
Consequently, trade (however imbalanced) has increased between certain countries on the continent and China.