The currency swap, which simply means an agreement to exchange currency between two foreign parties, will make it easier for most Nigerian manufacturers, especially small and medium enterprises (SMEs) and cottage industries in manufacturing and export businesses to import raw materials, spare-parts and simple machinery to undertake their businesses by taking advantage of available RMB liquidity 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 enough Naira from banks in China to pay for their imports from Nigeria.
Indeed, the deal will protect Nigerian business people from the harsh effects of third currency fluctuations.
The transaction, which is valued at Renminbi (RMB) 16 billion, is aimed at providing adequate local currency liquidity to Nigerian and Chinese industrialists and other businesses thereby reducing the difficulties encountered in the search for third currencies.
Analysts in the financial services sector unanimously agreed on Thursday that the development will enhance and reduce volatility in naira dollar exchange rate and boost bilateral trade between Nigeria and China.
“This will further increase trade between China and Nigeria”, Johnson Chukwu, managing director/CEO, Cowry Asset Management limited told BusinessDay by phone.
Although Chukwu was concerned that the trade between the two countries is not balanced, he said Nigeria will enjoy some form of credit, adding that it has to be unwound.
China’s bilateral trade with Nigeria rose by more than 30 percent to $12.3 billion in 2017. The two countries established formal diplomatic relations in February 1971.
Among other benefits, the agreement will 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.
It will also assist both countries in their foreign exchange reserves management, enhance financial stability and promote broader economic cooperation between the two countries.
Ayodeji Ebo, managing director, Afrinvest Securities limited said with the currency swap, it would be easier for importers to fund their transactions rather than demand for dollar to fund same.
“Pressure on dollar will reduce, it will help facilitate trade, improve relationship with China and boost businesses”, Ebo said.
Nigeria added the Yuan as part of its foreign reserve in 2011 and agreed a swap deal with Industrial and Commercial Bank of China limited (ICBC), the world’s biggest lender in 2016.
Local traders told Reuters on Thursday said demand pressure was piling up on the currency market as some companies were repatriating dividends following the end of the earnings season coupled with importers buying foreign goods to resell at home.
A statement signed by Isaac Okorafor, acting director, corporate communication, said with the transaction, Nigeria becomes the third African country to have such an agreement in place with the PBoC.