Nigeria has signed a three-year bilateral currency swap agreement with The People’s Bank of China (PBoC) in Beijing on Friday. China’s central bank announced the deal in a statement on its website on Thursday.
“With the approval of the State Council, the People’s Bank of China signed a bilateral local currency swap agreement with the Central Bank of Nigeria in Beijing for the purpose of facilitating bilateral trade and direct investment, and safeguarding financial market stability in both countries” the statement said. “The size of the swap facility is RMB 15 billion/NGN 720 billion. The agreement is valid for three years and can be extended upon mutual consent.”
A bilateral currency swap deal allows two institutions exchange payments in one currency for equivalent amounts in the other to facilitate bilateral trade settlements and provide liquidity support to financial markets. The foreign exchange transaction involves the exchange of interest and sometimes of principal in one currency for the same in another currency.
While announcing the deal, the Central Bank of Nigeria (CBN) in a separate statement said, “This agreement will provide naira liquidity to Chinese businesses and provide RMB liquidity to Nigerian businesses respectively, thereby improving the speed, convenience and volume of transaction between the two countries.”
Nigeria’s Central Bank Governor, Godwin Emefiele and Yi Gang, Governor of The People’s Bank of China signed the currency swap agreement on behalf of both countries. CBN noted that there had been “painstaking negotiations” with the Chinese central bank for over 2 years to have secure this the bilateral currency swap agreement.
“It will also assist both countries in their foreign exchange reserves management, enhance financial stability and promote broader economic cooperation between the two countries,” CBN added.
Prior to this development, former CBN deputy governor Kingsley Moghalu had said the bank was seeking to increase the percentage of Yuan foreign reserves in its possession from two per cent to seven per cent.
“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.
Going further to highlight what the currency swap agreement entails, CBN noted in its statement that “With the operationalization of this agreement, it will be 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 scare 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”.
Nigeria becomes the third African country to have such an agreement with the PBoC. after Zimbabwe and Ghana.