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Nigeria – China Bilateral Currency Swap Agreement: a Cost-Benefit Analysis of the Policy

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Nigeria – China Bilateral Currency Swap Agreement: a Cost-Benefit Analysis of the Policy Nigeria – China Bilateral Currency Swap Agreement: A Cost-Benefit Analysis of the Policy. October 28th, 2019. Nigeria – China Bilateral Currency Swap Agreement: A Cost-Benefit Analysis of the Policy Ejiro U. Osiobe Founder/CFO of the Ane Osiobe International Foundation Plot 114 Lugbe, Federal Capital Territory NG, 900001, Nigeria. Odezi M. Oseghe Research Associate at the Ane Osiobe International Foundation Delta State Liaison Branch, Delta State, Nigeria. Abstract This study probes the effects of the currency swap agreement between the Nigerian government through the Central Bank of Nigeria (CBN) and the Chinese government through the People’s Bank of China (PBC). The objectives of this paper are to define the concepts of currency swap, review relevant literature, and analyze its policy implication on the Nigerian economy. The Bilateral Currency Swap Agreement (BLCSA) between the CBN and the PBC, aims to achieve foreign exchange stability and hedge the naira from volatility both in the short and long run of each business cycle. The literature reviewed suggests the BLCSA would eliminate the unnecessary rigors involved in trade between Nigeria and China businesses and reduce the demand of the United States (US) dollar. Although a step in the right direction, this solution is a temporary fix when a permanent solution is needed. The study’s recommendations will elicit the necessary responses from the CBN, PBC, stakeholders, China, and Nigeria government on the benefits of the BLCSA* Keywords: Currency Swap, Nigeria, China, Naira, transactions’ have been made using the US dollar (CBN, 2017). Nevertheless, the CBN in 2011 decided to hold a BLCSA. part of its foreign exchange reserves in the CNY. This could be attributed to two reasons; firstly, China is Acknowledgments: becoming a significant player in international trade and secondly, China is the highest import origin of Nigeria as in Dr. S.A. Osiobe funded this work and the contribution of 2017 (OEC, 2019). Ane Osiobe International Foundation in this project, as specified under the ethics statement of Ane Osiobe Statistically, bilateral trade between Nigeria and China International Foundation, Ane Osiobe Trendsetters series stood at about $ 414.7 USD-billion as at 2016 and provides the public with transparent, unbiased information accounted for 22% of Nigerian merchandise import as at to help foster growth and development in Africa. the fourth quarter of 2017 (Adu & Ahmed, 2018). Owing to the high volume of trade between Nigeria and China, the CBN undertook a BLCSA with the PBC to facilitate the Introduction ease of doing business together. No sovereign body controls all resources it needs for Since 2008, the Chinese government has signed thirty-five production, and if it does, the opportunity cost to operate as BLCSA agreements with other countries (see Table 1.) a closed economy would be high as resources are scarce. Countries that engage in international trade, have different Study Limitation: currencies. Thus, there is a need to find a common currency No empirical analysis was carried out in the study, as the with which the respective countries’ can trade. This period for the BLCSA is not sufficient to analyze the currency is called foreign reserve currency2. The USD is impact of the Nigeria – China Bilateral Currency Swap commonly used for international trade, as most countries’ Agreement and its effect on the US dollar and naira in the have foreign exchange reserves in US dollars. international market as the BLCSA was enacted on April 27th, 2018. Since the introduction of the US dollars as a foreign reserve currency by the CBN in 1967, all international trade * Earlier version of this paper was presented at the Nigeria Journal of Economics and Social Science 60th Annual Conference on September 16th – 18th, 2019. 2 Also known as an anchor currency, is a currency held in significant quantities by sovereign governments as part of their foreign exchange reserves. The anchor currency is mostly used in international transactions, international investments, and all aspects of the global economy. Preprinted copy from The Ane Osiobe International Foundation © right October 2019. Submitted to and Forthcoming in the Nigerian Journal of Economic and Social Studies Nigeria – China Bilateral Currency Swap Agreement: A Cost-Benefit Analysis of the Policy. October 28th, 2019. Table 1: China's BLCSA with Non-African Countries (2008 – 2015) Country Swap Swap Amount Exchange rate as of 2019 Agreement (000,000,000 CNY) Date South Korea 12 Dec 2008 360 1 CNY=172.8 KRW Hong Kong 20 Jan. 2009 400 1 CNY=1.15 HKD Malaysia 8 Feb. 2009 180 1 CNY= 0.61MYR Belarus 11 March. 2009 7 1 CNY= 0.31 BYN Indonesia 23 Mar. 2009 100 1 CNY=2107.15 IDR Argentina 29 March 2009 70 1 CNY= 6.63 ARS Iceland 9 Jun 2010 3.5 1 CNY = 17.92 ISK Singapore 23 Jul. 2010 300 1 CNY = 0.20 SGD New Zealand 18 Apr. 2011 25 1 CNY = 0.22NZD Uzbekistan 19 Apr. 20131 0.7 1 CNY= 1238.36 UZS Mongolia 6 May. 2011 15 1 CNY= 392.06 MNT Kazakhstan 13 Jun 2011 7 1 CNY = 55.71 KZT Russia 23 Jun 2011 150 1 CNY = 9.61 RUB Thailand 22 Dec 2011 70 1 CNY = 4.65 THB Pakistan 23 Dec 2011 10 1 CNY = 20.81 PKR UAE 17 Jan 2012 35 1 CNY = 0.54 AED Turkey 21 Feb. 2012 10 1 CNY = 0.91 TRY Australia 22 Mar. 2012 200 1 CNY = 0.21 AUD Ukraine 26 Jun 2012 15 1 CNY = 3.84 UAH Brazil 26 Mar 2013 190 1 CNY = 0.58 BRL UK 22 Jun 2013 200 1 CNY = 0.11 GBP Hungary 9 Sept. 2013 10 1 CNY = 42.22 HUF Albania 12 Sept, 2013 2 1 CNY = 16.10 ALL EU 9 Oct, 2013 350 1 CNY = 0.13 EUR Switzerland 21 Jul 2014 150 1 CNY = 0.15 CHF Sri Lanka 16 Sept 2014 10 1 CNY = 25.83 LKR Qatar 3 Nov 2014 35 1 CNY = 0.53 QAR Canada 8 Nov. 2014 200 1 CNY = 0.20 CAD Nepal 23 Dec 2014 0.6 1 CNY = 16.38 NPR Suriname 18 Mar. 2015 1 1 CNY = 1.09 SRD Chile 25 May 2015 22 1 CNY = 100.24 CLP Tajikistan 5 Sept 2015 3.2 1 CNY = 1.38 TJS Source: PBC Database http://www.pbc.gov.cn/huobizhengceersi/214481/214511/214541/3353326/index.h tml Subsequently, Nigeria became the third African country to CBN and the PBC was signed on Friday, 27 April 2018 join the league of BLCSA with China (PBC database, (CBN, 2018). The BLCSA is intended for a 3year period 2019). The driving force for these swap agreements is to and the maximum exchange of 15 Billion CNY for ₦ 720 support trade and investment as well as to encourage Billion. The BLCSA between China and African Countries’ trading with the CNY at the international market (Council can be seen in Table 2. on Foreign Relations, 2015). The BLSCA between the Table 2: China’s BLCSA with African Countries (2015 – 2018) Countries Swap Agreement Amount Agreed Upon Exchange rate as of Date (000,000,000 CNY) 2019 South Africa 10 April 2015 30 1 CNY = R2.1 Egypt 06 Dec 2016 18 1 CNY = EGP2.51 Preprinted copy from The Ane Osiobe International Foundation © right October 2019. Submitted to and Forthcoming in the Nigerian Journal of Economic and Social Studies Nigeria – China Bilateral Currency Swap Agreement: A Cost-Benefit Analysis of the Policy. October 28th, 2019. Nigeria 27 April 2018 15 1 CNY = ₦52.73 Source: PBC Database http://www.pbc.gov.cn/english/130437/index.html Conceptual Definition of Currency Swap receive interest payments on the principal amounts ₦ The currency swap is a bilateral agreement to exchange 530million and 15 million CNY. As with other forms of cash flows in different currencies at some predetermined currency swap, irrespective of whether there was an initial rates for a specified period (CBN, 2016). According to exchange, the currency swap parties would re-exchange the (Jackson et al. 2018), a currency swap agreement entails agreed amounts initially. the process by which two countries make available their respective currencies to one another to facilitate direct trade Review of Literature: between them, rather than relying on a third-party currency. On the relevance of the US dollar sustaining its worldwide It can also be defined as a swap in an equivalent amount in position as one of the most used reserve currencies of the another currency to smoothen bilateral trade settlements world, Van (2014), comments that the effect of China’s and provide liquidity support to financial markets. currency swap agreements with other countries on US economy will have a significant effect on the dollar. These swap deals between countries, help to facilitate According to him, this will arise as a result of the bilateral trade settlements using their national currencies, international community reduced dependence on the dollar instead of a third-party currency, in this case, the US dollar, for foreign trade. Thus, the dollar’s reserve currency status which is the dominant global reserve currency. This will be diminished. Durden (2014) corroborates this, stating agreement between Nigeria and China is designed to that China’s currency swap agreement with other countries "provide naira liquidity to Chinese businesses and provide may threaten the influence of the US dollar as a reserve renminbi liquidity to Nigerian businesses respectively, currency. This he attributed to the imported inflation thereby improving the speed, convenience, and volume of countries who hold foreign exchange reserves in dollar transactions between the two countries,” according to the experience from time to time. CBN (Ubi, 2018). Adhikari (2016) studies the consequence of China and Types of Currency Swap: Indonesia currency swap on the Value of the US dollar.
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