FBN, Stanbic, StanChart, Zenith Appointed Settlement Banks for Naira/RMB Currency Swap

•  Deal valid for three years, renewable

Obinna Chima

First Bank of Nigeria Limited, Stanbic IBTC, Standard Chartered Bank (SCB) and Zenith Bank Plc have been appointed the settlement banks for the $2.5 billion bilateral currency swap agreed between the Central Bank of Nigeria (CBN) and the People’s Bank of China (PBoC) which was announced Thursday.

A reliable CBN source privy to the deal, said with the appointment of the four banks as the settlement banks for currency swap between China and Nigeria, they will be responsible for settling the trade transactions between importers and exporters from both countries, likely to take off just before next month.

The CBN Thursday announced that it had sealed the deal on the $2.5 billion (RMB 16 billion) currency swap with the Chinese central bank last Friday in Beijing, China.

CBN spokesman, Mr. Isaac Okorafor, said the CBN Governor, Mr. Godwin Emefiele, led CBN officials while PBoC Governor, Dr. Yi Gang, led the Chinese team at the official signing ceremony.

He said the deal was sealed on Friday after over two years of painstaking negotiations by both central banks.
According to the CBN, the transaction, which was valued at Renminbi (RMB) 16 billion, was 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.

Providing more clarity on the deal, a CBN source said just as negotiations on the currency swap were being wrapped up, the central bank appointed FirstBank, Stanbic IBTC, StanChart and Zenith Bank to serve as the settlement banks for businesses and importers from both countries.

She said the reason the four financial institutions were chosen was because StanChart and Stanbic already have operational offices in China, while Zenith and FirstBank have representative offices in Beijing.

However, whereas StanChart and Stanbic can start operations immediately as settlement banks, Zenith and FirstBank will be required to upgrade their representative offices to full operations in China.

“While SCB already has a presence in China through its Standard Chartered Bank (China) Limited, Stanbic has been trading in the country through its affiliate, the Investment and Commercial Bank China (ICBC).

“However, FBN and Zenith Bank were also appointed because they already have representative offices in China.
“So, while SCB and Stanbic can start immediately, it would take FBN and Zenith Bank some time to join the settlement arrangement because they would have to convert their representative offices to operational offices.
“This whole swap agreement would kick off likely before June because we have to operationalise the settlement arrangement with the relevant institutions,” she added.

The settlement banks are expected to handle the trade obligations that would enable an importer in Nigeria, after filling the required documentation, to easily exchange the naira for the Renminbi (RMB) instead of resorting to third currencies such as the U.S. dollar, while the reverse will be the case for importers in China that trade with Nigerian businesses.

She explained further that the currency swap by the two central bank governors was partly facilitated by the improving economic environment in Nigeria.

“As you know, negotiations have been on-going for two years, so yes to some extent, the improvement in foreign reserves and government revenues, drop in the inflation rate, and the uptick in economic activities, played a role in getting the swap with the PCoB.

“But this was not the only reason factored into the negotiations, as there were other bilateral reasons which I am not at liberty to disclose,” she said.

When asked about the impact on the country’s external reserves, the source pointed out that China is Nigeria’s largest trading partner, accounting for about 35 per cent of trade.

However, the National Bureau of Statistics’ (NBS) Fourth Quarter (Q4) 2017 Foreign Trade Statistics put China’s trade with Nigeria at 22 per cent, making it a major trading partner. The total value of trade in Q4 2017 was put at N465.13 billion.

According to the CBN source, the currency swap will play a role in reserves management as pressure from Nigerian importers seeking to source dollars will now dissipate.

“Of course, this will help in terms of management of our reserves. What this means is that pressure on Nigerian importers seeking to source dollars to import goods from China will completely dissipate,” she explained.

Reinforcing the position, the statement from Okorafor Thursday said among other benefits, the agreement is expected to 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.

“With the operationalisation 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 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.
“With this, Nigeria becomes the third African country to have such an agreement in place with the PBoC.

“Both the Nigerian and Chinese officials expressed delight at the conclusion and signing of the agreement and expressed the hope that it would boost mutually beneficial business transactions between Nigeria and the Peoples Republic of China,” the statement said.

The PBoC also said on its website that its governor Yi Gang met with Emefiele during the recent IMF/World Bank Group spring meetings held in Washington D.C., where they exchanged views on bilateral financial cooperation, as well as other related issues.

“On April 27, 2018, 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 agreement is valid for three years and can be extended upon mutual consent,” the Chinese central bank added.
Commenting Thursday on the currency swap agreed to by both countries, the Director General of the Lagos Chamber of Commerce and Industry (LCCI), Mr. Muda Yusuf, said the deal would positively impact trade and investments between Nigeria and China.

“It will impact on trade positively between Nigeria and China, because it would make the payment system easier. However, it can only last if the exchange rate remains stable. This is because if there are issues with the exchange rate, it may affect it,” he added.

To the Senior Economist at Exotix Capital in London, Christopher Dielmann, the currency swap line should be viewed very positively.

“The CBN has done an excellent job over the past year in attracting dollar inflows as well as stabilising the naira’s valuation on a REER (real effective exchange rate basis) basis through the introduction of the Investors’ and Exporters’ Window.

“It is for this reason that the recently opened swap line might not be as beneficial for Nigerian importers of Chinese goods as it could have been, perhaps two years ago, as it has already become much easier to access RMB (through dollar purchases) but it does show an on-going commitment by both central banks to promote bilateral trade, something that will be very welcomed by firms in both countries,” he explained in response to THISDAY’s e-mail.

But the chief executive of the Financial Derivatives Company Limited, Mr. Bismarck Rewane, held the view that the timing of the agreement “a few days after President Muhammadu Buhari left the United States where he held discussions with President Donald Trump on trade, raises some questions”.

“Maybe it is to reassure the Chinese that the fact that we had gone to the U.S. doesn’t mean we have forgotten our relationship with China,” he added.

In 2016, when negotiations on the currency swap commenced, Emefiele had expressed optimism that the agreement would strengthen the naira and help reduce the strong demand for the U.S. dollar in the country.

The CBN said it planned to diversify its forex reserves away from the dollar by switching a stockpile into yuan. It had converted up to a tenth of its reserves into yuan about seven years ago.

Emefiele had explained that Nigeria was not the only country that had agreed to a currency swap with China, as several other countries – developed and emerging markets – with growing trade volumes with China had entered into similar currency swaps with the Asian country.

The countries are the United Kingdom, Belarus, Malaysia, South Africa, Australia, Armenia, Surinam, Hong Kong, Pakistan, Thailand, Kazakhstan, South Korea, Canada, Qatar, Russia, the European Union, Sri Lanka, Mongolia, New Zealand, Argentina, Switzerland, Iceland, Albania, Hungary, Brazil, Singapore, Turkey, Ukraine, Indonesia, Uzbekistan, and the United Arab Emirates, totalling over RMB3.137 trillion.

“The agreement on the currency swap with China will definitely benefit Nigeria because the essence of the mandate is to ensure that Nigeria is designated as the trading hub with China in the West African sub-region for people who want the Renminbi as a currency denomination,” Emefiele had said at the time.

When reminded that trade between Nigeria and China was skewed heavily in favour of China, he said: “On the reverse, we are working to encourage the export of raw materials to China in order to reduce the trade imbalance.

“And we aim to become competitive by improving on infrastructure especially in the area of electricity and ensuring that credit is made available to manufacturers at concessionary rates.”

Two years down the line, Nigeria is still struggling to upgrade its infrastructure and make loans available to businesses at lower interest rates.