Indications are that the recent currency swap deal between Nigeria and China will increase the size of Nigeria’s trade deficit with China as China sells more to Nigeria and Chinese companies in Nigeria make more profits and remit these back to China. However, it could still be beneficial to Nigeria if the funds are used to improve the competitiveness of the Nigerian economy. This is the view expressed by Bode Augusto and Co in his analysis of the transaction.
In a power point presentation Augusto said that Nigeria will exchange Naira for the Chinese Renminbi (RMB) an equivalent of $2.5 billion. He said that at the current exchange rates, Nigeria will receive Chinese RMB 16.0 billion and the CBN will give N900 billion to the People’s Bank of China (PBC). According to him, at the expiration of the contract, the CBN will refund the RMB and the People Bank of China PBC will refund the NGN at the pre-agreed exchange rate. The two central banks he said will be acting on behalf of their central governments, the FGN and the Government of China. Continuing his argument he said
What does it mean for Nigeria?
The CBN will receive RMB 16.0 billion which will increase the foreign currency assets of Nigeria and also increase the foreign currency debts of Nigeria by an equivalent amount. This means that the transaction is neutral on a net assets basis (i.e. assets minus liabilities).
“CBN will pay interest, at the agreed rate, to the PBC on the RMB loan and may also receive interest on its Naira loan to the PBC. More foreign exchange will be available to the CBN to stabilise short-term exchange rates and to finance importation. Since the bulk of international trade is conducted in dollars, it is very likely that the bulk of the money will be used to import goods and services from the People’s Republic of China.
How will the CBN get NGN 900 billion to pay PBC?
It will either borrow – from foreign investors or the domestic financial system or a mix of both, or use the mandatory cash reserves it has taken interest-free from banks in Nigeria, or print Naira and hand this over to the PBC. On the settlement day, Nigeria will pay the agreed amount of RMB to PCB. If the CBN has no RMB, it will either sell some of Nigeria’s USD reserves to buy RMB, or borrow USD and convert these to RMB
What does it mean for China?
The PCB will receive N900 billion, increasing the Naira assets of the bank and reducing its RMB savings by an equivalent amount.
What will China do with Nigerian Naira?
The Chinese Government will most likely lend these funds to Chinese businesses in Nigeria at concessional interest rates. This should improve the competitiveness of Chinese businesses operating in Nigeria and help them deepen their operations in the country. China pursues a policy of State-led capitalism. Therefore, it is not unlikely that most of these businesses will be government-owned. On the settlement date, the PBC will repay the NGN from one or more of the following sources, profits generated by Chinese businesses in Nigeria to whom the funds were loaned; PBC sells RMB or USD for Nigerian Naira; PBC borrows Naira from the Nigerian financial system (unlikely)
What is the substance and economic reality of this transaction?
China has lent foreign currency reserves to Nigeria to enhance the ability of Nigeria to buy from China. It will most likely use the Naira it receives to enhance the competitiveness of its businesses in Nigeria. According to Augusto the key questions are; do Nigerians have businesses in China that the federal government can help? If not, will Nigeria use the RMB borrowed to improve the competitiveness of
the Nigerian economy? e.g. build railways or improve the capacity and efficiency of the electricity grid? Or, will Nigeria simply use the RMB to import largely finished goods and consume them?
