Friday, May 04, 2018 06:27 PM / Proshare Research & Analysis Opiniont
At the end of 2017, the total amount of goods imported from China stood at N1.788 trillion, thereby imports from China grew by 3% compared to previous horizon. The current trade dynamic puts China as Nigeria’s major trading partner, as goods imported from China alone makes up to 19% of aggregated imports in 2017.
Presently, the total values of imported goods from China to Nigeria Gross domestic product (GDP) stand at 1.58% to GDP.
Fig 1: Value of imports from Nigeria major trading partner from 2015 to 2017
Therefore, in the light of the growing trade between Nigeria and China, the Central Bank of Nigeria (CBN) and People’s Bank of China (PBOC) signed a currency swap.
The Currency swaps signed between the two lenders of last resort is valued at $2.5 billion, translating to 16 billion Renminbi (RMB).
Currency swaps are regarded as agreements to exchange cash flow between two parties usually referred to as counter parties. It is expected that counter parties to the agreement are to exchange an amount of funds at regular interval, until the swap expires.
China is known for promoting bilateral currency swap agreements (BSA), as a measure of fostering its external trade.
In specifics the swap is tailored towards cross- flow pattern, thereby eliminating the initial 2 currency exchange route; whereby the Naira is first exchange to the dollar nomination, eventually exchanged to the RMB. The tailored swap however eliminates the role of the Dollar as an intermediary but allows for direct exchange between the Naira and the dollar. Therefore what are the benefits of the currency swap?
IMPLICATIONS, IMPACT AND ASSESSMENT
· The currency swap reduces the cost of transaction due to the cross-flow nature of the swap;
· Most importantly, this agreement enhances the liquidity of the RMB, which is considered as a third currency;
· Like most currency swaps, it allow Nigeria businessmen to take positions, thereby reducing their risk exposure to currency volatility;
· The PBOC and CBN are committed to a pay-off profile, whereby funds are exchange at intervals prior to the expiry of the contract;
· The possibility of a default is less likely, thereby smoothening trade;
· The currency swap ensures letter of credits are made more accessible to the Nigeria businessman;
· The currency swap largely ensures faster execution of trade by both parties; and
· Apart from fostering better trade relationship, it also serves as a means of creating collaboration between both Central Banks.
The execution of this agreement and its implications for Forex, Trade, Funding and indeed, the overall Economy…as it will be rightly subjected to further analysis and should not, as yet, be signposted as “the ultimate deal”.