Four years after Yuan swap deal, forex pressure mounts
• Only 2.6% of imports from China funded with Yuan swap auction in four years
• ‘Naira volatility, a major drawback in future negotiation’
• China accounts for over 25 per cent of Nigeria’s imports
• Trade value climbs to N19.57tr since MoU was first signed
• Currency exchange good deal but time for ‘house cleaning’, says Owoh
Four years into the Nigeria-China currency exchange programme, trade and currency sale data suggest the deal is barely scratching the surface of the huge illiquidity hurdle importers must surmount to lift goods from the global manufacturing hub.
As at end of the second quarter, and a year into renewal of the CNY16 billion bilateral currency swap, the total amount of yuan auctioned by the Central Bank of Nigeria (CBN) from inception was CNY7.044 billion.
Indeed, demand for the US dollar has remained stronger, owing to several factors, some of which include multiple conversions involved in international trade due to dollar benchmarking, weak local currency and high preference for the dollar over other currencies.
CBN’s 2022 Financial Market Half-Year Report disclosed that a total of CNY1.263 billion was sold in 13 auctions in H1 2022, compared with CNY1.217 billion sold in 13 auctions in the first half of 2021. Plus other previous auctions, since the
programme kicked off, the apex bank had sold CNY7.044 billion as at the end of June.
The performance status report of the programme for the second half is not ready but experts said it might not be remarkably different from historical data.
The total amount sold in advancement of the bilateral deal is less than the value of the deal, which was intensely negotiated for two years before the much-publicised contract signing by heads of the monetary authorities of the two countries on April 27, 2018.
Led by the Governor, Godwin Emefiele, officials of the CBN and the Peoples Bank of China (PBoC), led by their boss, Dr. Yi Gang, were locked in painstaking negotiations for over two years before a memorandum of understanding (MoU) was signed in Beijing, an event described as a game changer in the search for headway in the FX liquidity crisis.
“The transaction, which is valued at Renminbi (RMB) 16 billion or the equivalent of about $2.5 billion, is aimed at providing adequate local currency liquidity to Nigerian and Chinese industrialists and other businesses, thereby, reducing difficulties encountered in the search for third currencies,” the CBN had said.
Among others, officials of the apex bank said the swap would provide naira liquidity to Chinese businesses and provide RMB liquidity to Nigerian businesses,
respectively, thereby improving the speed, convenience and volume of transactions between the two countries.
The Renminbi processed and sold under the currency swap agreement could only fund 2.6 per cent of the value of goods Chinese companies sold to Nigerians. The amount, in the same strength, was about two per cent of the total value of trade between Nigeria and China. The currency swap contract value (CNY16 billion) does not seem to take into full consideration the volume of Nigeria-China trade, to realistically reduce the illiquidity concern.
A comprehensive naira-yuan arrangement could reduce the FX need for physical goods importation by as much as over 20 per cent. In Q3 2022, China alone accounted for 26.95 per cent of the total import bills, estimated at N5.67 trillion.
Of this figure, only N365.9 billion was settled in dollars. But importers had to first source for dollars (the primary currency of trade) and convert to currencies of other countries to complete transactions. The multiple conversions involved in international trade due to dollar benchmarking, coupled with attendant increase in transaction cost, is a major glitch that currency exchange arrangements are meant to eliminate.
The value and volume of foreign trade between the two countries, indeed, has grown. But the expansion has been one-sided and driven by China’s imbalanced global trade. While Nigeria’s leakages have increased tremendously, depriving local manufacturers of the opportunity to leverage the huge market to create jobs
for the army of jobless youths, China continues to rake in trillions of naira from the Nigerian market.
Nigeria’s quarterly exports to China have fallen by 13 per cent between when the MoU took off and the end of H1 2022. The figure, in naira terms, dropped from N81.87 billion in Q3 2018 to N71.11 billion in Q2 2022.
Extended to last quarter, which is the most recent trade data publicly accessible, Nigeria’s exports to the Asian giant have fallen by 28.4 per cent. The monetary value of the country’s total exports to China in Q3 2022 was N58.6 billion.
Nigeria’s export growth is far slower (now in the negative territory) than the country’s moderate 3.3 per cent quarter-on-quarter (q/q) average growth in imports in the period. The import figure rose from N4.85 trillion in Q3 2018 to N7.4 trillion in Q2 2022. The Nigeria-China export performance has earned the worst growth among other Asian trading partners.
For example, export to Japan rose by over 100 per cent, from N45.45 billion in Q3 2018 to N109.2 billion in Q2 2022, while that of India, the country’s historical top trading partner (in export), jumped by over 47 per cent, from N764.9 billion to N1.1 trillion in Q2 2022. Driven by Japan and India, Nigeria’s exports to Asia ballooned over twofold to N1.15 trillion in the period.
agreement, instead of an improvement in our forex exchange. It is clear that there are fundamental drawbacks to some of these policies and interventions that are not publicly available,” Uba stated.
The economist decried the overwhelming role of the black market in the country’s FX transactions, saying the underlying challenges in the market must be fixed, if other innovative add-ons would make any difference and bring real value.
According to him, currency swap, at the moment, is an academic exercise that might not alleviate pressure on the naira. He argued: “Currently, over 95 per cent of FX for imports for traders, manufacturers and others are obtained from the parallel market, despite the currency swap. Why should those who import goods from China abandon the existing currency swap platform for the parallel market?
“Except China, India, South Korea and the United Arab Emirates, the rest of the top 10 countries in total imports are the United States, United Kingdom and European countries, and they account for 31.51 per cent of the 72.73 percentage share of the top 10 countries in total imports.
“On the other hand, European countries represent 36.6 per cent share of the top 10 countries in total exports. The United States represents 5.66 per cent, India (10.44 per cent), Indonesia (seven per cent), South Africa (4.83 per cent) and Ivory Coast (4.52 per cent). It is evident from the foregoing that it might be difficult to mitigate the current forex pressure by entering into currency swap with the European Central Bank (ECB) and the United States.