Nigeria has strengthened efforts to improve its foreign exchange (forex) liquidity with the announcement of a multibillion-dollar currency swap deal with China.
The agreement, signed between the countries’ two central banks on April 27 and valued at N720bn (about $2.5bn at the time), is valid for three years, and will allow for the direct use of local currencies in bilateral deals.
According to the Central Bank of Nigeria (CBN), the development will improve foreign currency liquidity by providing naira to Chinese traders seeking to purchase raw materials, as well as protecting Nigerian importers from fluctuations in third currencies.
It should also facilitate stronger bilateral trade by making both parties less reliant on the US dollar. China is Nigeria’s second-largest trading partner after the US, according to Bloomberg data, with trade volumes between the two totalling $9.2bn last year.
The deal follows the UK’s decision to add the naira to its list of pre-approved currencies for trade in February, a development expected to streamline investment between the countries.
The recent developments come on the back of improving forex levels in recent times, driven in part by a series of government measures.
In April last year the CBN introduced a forex window specifically designed for small and medium-sized businesses. Officials said the development aimed to boost foreign currency levels among smaller operators, who are often crowded out of the market by larger companies.
This was followed later in the month by the establishment of a forex window for investors and exporters (I&E), designed to further deepen foreign currency liquidity. With prices on the window to be market driven, it is expected to boost transparency and encourage the participation of foreign portfolio investors.
Foreign reserves stood at around $48bn as of mid-May, a 55% year-on-year increase, with the CBN’s Monetary Policy Committee citing strong activity in the I&E window as a key factor behind increased liquidity. Furthermore, in a sign of positive market sentiment, credit rating agency Moody’s predicts the figure could reach $55bn by the end of the year.
The CBN has maintained a sustained intervention in the market, injecting more than $18bn into the interbank segment between February 2017 and the end of March this year, according to local media, generally in the form of weekly injections of $210m.
These measures have also helped to stabilise the naira, which has kept close to 360:1 to the dollar on the I&E window since April last year. Meanwhile, the parallel market premium has narrowed to about 20% of the official rate of 305:1, down from its peak of 60% in February 2017.
While commending the CBN on its recent forex measures, the IMF – in its most recent country report on Nigeria, released in March – called for the country to establish a unified and more flexible exchange rate.
The fund said that although the CBN’s continued injection of cash into the forex market had helped stabilise exchange rates, such intervention could slow longer-term investment and hinder efforts to diversify the economy.
The increased forex liquidity is also expected to attract higher levels of investment and could have positive implications for the country’s debt markets.
In 2015 investment bank JP Morgan excluded Nigeria from its Government Bond Index-Emerging Markets classification, which tracks local currency bonds issued by emerging market governments.
The firm cited liquidity and transparency issues, along with the lack of a fully functional two-way forex market, as key factors behind the decision, and noted that Nigeria would have to uphold re-inclusion criteria for at least 12 months to be reconsidered for the index.
With the establishment of the I&E window in April 2017 and foreign reserves up over the same period, some analysts have predicted that Nigeria could be re-admitted to the index.
However, financial analyst Proshare Nigeria warned that, while transparency and liquidity have improved, it may take a while for the I&E window to be fully considered a two-way market, given its supply-driven nature, which may further delay international classification and recognition.
Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.
Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.
Register Here×A new draft National Information and Communications Technology ICT Policy, released in January, aims to bring together all of Nigeria’s related technology policy under a single statute,...
Amidst a slowdown in the Middle East’s private equity industry, Jordan’s small and medium-sized enterprises (SMEs) are set to get a boost from a new private equity fund.
The Turkish Prime Minister Bulent Ecevit has spent the last week in the US hoping to garner support for economic reforms at home and trade concessions for Turkish exports to the US.
