Gains of Bilateral Currency Swap Agreement

During the week, the Central Bank of Nigeria (CBN) and People's Bank of China (PBoC) announced the conclusion of a bilateral currency swap agreement between Nigeria and China valued at Renminbi (RMB) 15.0bn or N720.0bn. The 3-year Agreement, signed by respective Central bank Governors on Friday, 27th April 2018, 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 on 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 2021 or reversed.

We view the agreement as a positive development, given the FCY liquidity squeeze Nigeria frequently experiences and the strong trade & investment ties between the two countries. According to the trade statistics by the National Bureau of Statistics (NBS), merchandise trade between China and Nigeria reached a record high of N2.0tn in 2017 (8.7% of total Merchandise trade), thus making China Nigeria’s 3rd 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. This is clearly suggestive of Nigeria’s growing dependence on China, much like most of the rest of the world, for manufactured products and industrial inputs, reinforcing the importance of this currency swap agreement for Nigeria’s import dependent Manufacturing and Trade sectors which jointly contribute 27.8% to GDP.

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. 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. Lastly, this agreement could serve as a risk management and unconventional monetary policy tool as probable losses resulting from transactions affected by volatility in the local currency could be hedged and minimized. As an unconventional monetary policy tool, in managing third currencies pressures and liquidity, the importance of the bilateral currency swap agreement between Nigeria and China cannot be neglected.

Whilst we are excited by the symbolism of this agreement, we also note that 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 skepticism. Yet, it also emphasizes the need to deepen domestic policies on improving competitiveness.
Manufacturing and Non-manufacturing PMIs Expand for the 13th and 12th Consecutive Month
The CBN released Purchasing Manager’s Index (PMI) data for April 2018 on Monday with both Manufacturing and Non-manufacturing Composite indices showing economic activities expanded for the 13th and 12th consecutive months in both sectors. The sustained economic expansion is in line with consensus, reflecting gains from improved macroeconomic stability following the rebound in external sector variables and fiscal spending.

The Manufacturing PMI printed at 56.9 index points from 56.7 in March, indicating manufacturing activities grew at a faster pace. 12 of 15 subsectors surveyed reported growth. Similarly, the Non-manufacturing sector also expanded faster, settling at 57.5 points in April from 57.2 index points in March. 15 of 18 subsectors recorded growth in the period. We expect the expansion in the manufacturing and non-manufacturing activities to be sustained in the near term on the back of favourable outlook on external sector variables. We thus maintain our FY:2018 GDP growth forecast of 2.6%.