.. Laud Nigeria/China currency swap deal
There is a growing sense of unease over the failure of the Federal Government to pass the 2018 budget, an analyst at FXTM, Lukman Otunuga, has said.
The Appropriation Bill titled, ‘Budget of Consolidation’ submitted to the National Assembly last November has been embarrassingly delayed at both the chambers of the assembly.
With Nigeria being closely watched by global investors, such developments, he said, are likely to slowly erode confidence over the stability of the nation’s political landscape.
“It must be kept in mind that the Central Bank of Nigeria has already warned the Federal Government that “hard work” will be needed to prevent the country from skidding into another recession,” he stated.
Otunuga warned that while the 2018 budget has the ability to elevate Nigeria’s economy to new heights, there is a threat that the delay in implementation could negatively impact its overall effectiveness.
“It is worth noting that the N8.612 trillion budget was expected to consolidate the positive gains of the 2017 budget, and support the materialization of Nigeria’s economic growth recovery plan. Nigeria’s government remains on an ongoing quest to develop infrastructure and bolster investment in agriculture, but haste is needed,” the analyst said.
He said, “While rising oil prices have boosted government revenues and foreign exchange reserve, the long-term solution to Nigeria maintaining stability and steady growth remains in diversification.
“Nigeria should exploit the fact that the current oil price of $68.00 is $23.00 above the crude oil benchmark price of $45.00 per barrel in the budget. It is critical to keep in mind that oil can easily confiscate all it has gifted to Nigeria, and even more if prices start to depreciate.”
While the outlook for oil in the short term remains somewhat bullish amid geopolitical tensions and OPEC‘s optimism, the fundamentals behind the rally remain shaky. With Oil bulls heavily reliant on geopolitics to sustain the current rally, and rising production from US Shale obstructing OPEC’s efforts to stabilize markets, oil remains vulnerable to losses long term.
Otunuga however said still a high degree of confidence and optimism remains over Nigeria’s overall growth outlook, following the economic recovery witnessed in recent months.
He said: “Higher oil prices, easing inflationary pressures and ongoing foreign exchange stability have been critical, not only in cultivating, but also maintaining the positive sentiment.”
Meanwhile, analysts at Afrinvest view the bilateral currency swap agreement between Nigeria and China valued at Renminbi (RMB) 15.0bn or N720.0bn as a positive development, given the foreign currency liquidity squeeze Nigeria frequently experiences and the strong trade investment ties between two countries.
Last week, the Central Bank of Nigeria (CBN) and People’s Bank of China (PBoC) announced the conclusion of a bilateral currency swap agreement. The 3-year agreement, signed by respective central bank governors followed a 2-year long negotiation process between the two countries which began during President Muhammadu Buhari’s visit to China in April 2016.
Consequent upon the opening of the “Swap Line”, both central banks would exchange a stock of their local currencies (RMB 15.0bn/N720.0bn), which could either be extended by mutual consent at expiration in and the 2021 or reversed.
According to the trade statistics by the National Bureau of Statistics (NBS), merchandise trade between China and Nigeria reached a record high of N2.0 trillion in 2017 (8.7% of total merchandise trade), thus making China Nigeria’s third largest trading partner after India and the United States (accounting for 12.5% and 10.8% of merchandise trade respectively).
However, the Balance of Trade is heavily tilted in favour of China; imports from China in 2017 (N1.8tn) was 8.1x Nigeria’s export (N220.6bn) and accounts for 20.9% of total imports in the last five years.
The analysts said given the established strategic importance of China as a major trade partner, the bilateral currency swap agreement will be beneficial to the Nigerian economy in several ways. First, it would reduce currency transaction cost for importers and ease FX liquidity pressures in periods of FX rate volatility and/or scarcity.
They further added that the implementation of this currency swap will also enhance financial stability and external reserves management by reducing the volume of FX interventions in the local market needed to fulfill imports demand.
The experts however cautioned that, while “we are excited by the symbolism of this agreement, the impact on the economy will be limited by the relatively small size of the Swap Line which could barely cover 40.0% of Nigeria’s Chinese import in a single year.”
Furthermore, a key downside risk to the agreement is that the ease of transaction with a highly competitive country like China could worsen Nigeria’s trade balance and weaken domestic manufacturing capacity.
“We think this concern is justified, particularly in a period of heightened trade scepticism. Yet, it also emphasizes the need to deepen domestic policies on improving competitiveness,” they said.