Nigeria needs to develop competitive advantage in the production of certain exportable goods that China currently imports in order for the country to get the full benefits from the currency swap deal, according to FSDH Research, a subsidiary of FSDH Merchant Bank limited.
The Central Bank of Nigeria (CBN) recently signed a bilateral currency swap agreement with the People’s Bank of China (PBoC) worth about $2.4 billion. In local currencies, the swap is worth 15 billion Renminbi (RMB) or N720 billion.
The deal is expected to reduce the demand for U.S Dollar by Nigerians importing from China and consequently strengthen the value of the Naira. The deal will reduce certain barriers for Nigerian importers of goods from China and reduce the cost of transactions in multiple currencies.
FSDH Research’s analysis of the trade relationship between Nigeria and China in the last five years shows that Nigeria has a negative trade balance with China.
“While we believe the currency swap agreement may improve foreign exchange stability and aid external reserves management to a certain extent, it has some downside risks”, Ayodele Akinwunmi, head of research, told Journalists in Lagos .
Speaking at the monthly Economic and Financial Markets Outlook, titled Local Competitiveness and Currency Swap Deal, Akinwunmi expects a Gross Domestic Product (GDP) growth rate of 3.55 percent in first quarter of 2018. This positive recovery in the economy he said should drive credit creation, both in the manufacturing and non-manufacturing sectors.
The improved macroeconomic environment in the Nigerian economy strengthened the foreign exchange inflows and boosted the external reserves in April 2018. The favourable developments in the crude oil market and consistent inflows from the Investors’ and Exporters’ Foreign Exchange Window (I&E Window) were the major inflows into the external reserves. The 30-day moving average external reserves increased by 2.66 percent to $47.49 billion at the end of April, 2018, from $46.26bn at end of March.
The inflows through the Importers’ and Exporters’ Foreign Exchange Window (I&E Window) between April 2017 and April 2018 stood at $46.08 billion. The highest amount was recorded in January 2018. FSDH Research expects the positive domestic and external environment to further lead to external reserves accretion in the short-term and this development should provide further stability for the foreign exchange rate.
FSDH Research forecasts a further drop in inflation rate to 12.43 percent in April 2018. “We expect the inflation rate to drop to a single digit in July 2018 provided there is no food shortage in the country on account of the current rising crisis in the food producing areas in the country”.
HOPE MOSES-ASHIKE
