CBN in China

I bet everyone must have heard about the email fraud that took place at CBN. If you are still leaving under a rock, you can familiarize yourself with the recent event in this article from ThisDay newspaper.

THISDAY gathered last night that the suspended Deputy Governor, Financial System Surveillance, Joseph Nnanna, responded to some spam emails without first cross-checking the authenticity of the mails and following CBN stringent payment process before authorising the release of funds when the governor and several senior officials of the bank were on a flight to China last month.

What caught my attention, in the midst of this slip-up, was the destination of the CBN governor and some senior officials. Likewise, last month, Kemi Adeosun announced plans to borrow $2bn from China with an imminent visit, in company of the CBN governor, to finalize negotiations.

At this point, I would assume that the trips to China by both parties were of the same nature — negotiations for a chinese loan. Details of the proposed loan, to be used in funding part of the budget, haven’t been disclosed, and as a result leaves little for inference. However, with the revelation that some senior CBN officials accompanied Godwin Emefiele to China, on this supposed same trip with the Kemi Adeosun, makes me wonder:

Why would the governor needs an entourage of Deputy Governors and Directors to accompany the Minister of Finance in negotiating a loan?

Could the CBN delegation also be in China to hold discussions with the PBoC?

You know that aphorism:

“When two or more central banks are gathered, in the name of economic crisis, a bilateral or multilateral currency swap agreement is usually on the table.”

Okay I made that up. But the basis for a swap agreement between Nigeria and China is not far-fetched.

Bilateral trades have grown significantly over the last decade. According to the Consul General, trade volumes amounted to $13bn in 2015. Investments have also been flowing, evident in the increasing number of Chinese firms and ongoing development finance projects in the country.

A currency swap agreement between both central banks will help strengthen trade relations; encourage more investments and, most importantly, boost our reserves —currently at quarter-tank, almost empty.

There isn’t any image of Emefiele and Zhou together on the internet. Please manage this one

PBoC will receive naira or collateral (FGN Bonds) from the CBN, for the renminbi, at an agreed exchange rate. Upon expiration of the swap, the transaction is unwound at the same exchange rate and CBN pays an interest to the PBoC. The renminbi received by the CBN can be used to settle trade obligations or provide liquidity to the financial markets which can allay the current foreign exchange crisis.

I have previously mentioned how this would work.

if the CBN devalues, goes back to its managed float regime by relaxing some of its controls for flexibility; some capital flows might come in, based on the new value of the naira, to help jumpstart the interbank market (or the CBN can support by injecting additional liquidity beforehand like Egypt did recently). The banks can start trading dollar-naira again, within a tighter currency band, with CBN intervening through weekly auctions or when the upper limit is breached.

To create the additional liquidity to jumpstart the inter-bank market, the renminbi will be swapped for dollars and then sold in the market for onward delivery to the real sector.

The signing of swap agreements between central banks is not uncommon, it gained traction after the financial crisis in 2008. This article by the Council on Foreign Relations (CFR) has done a great job in giving a brief history on the rise of central bank currency swaps (CBCS).

China has been in the forefront of CBCS agreements, strategically using them to promote the international usage of its currency.

The CBN, recognizing the growing prominence of the renminbi for global trade, announced plan to increase its reserve allocation from 2 percent to 7 percent in 2014. On a side note, Nigeria was the first African country to include the renminbi in its foreign reserves.

Just last year, South African Reserve Bank and PBoC signed a three-year CNY30bn swap agreement; bringing the total number of China’s CBCS counterparties, across the globe, to thirty-two (32) according to the CFR.

China’s CBCS lines in 2015 ©

And now, we have China looking to explore other areas for cooperation at the time our Government is looking for foreign exchange to meet trade obligations.

The moment is ripe for a bilateral currency swap agreement to be on the table.

Although, there have been concerns about the direction of the growing China-Nigeria relations. China being the dominant partner, while Nigeria continues to not live up to its economic potential of being a powerhouse and rival. The former CBN govenor, Sanusi Lamido Sanusi, also shared similar concerns in a write-up, some years ago, on China’s trade relation with Africa as a whole.

Despite all concerns, the relations with China are generally viewed to be more beneficial, than harmful, to the country.

I just might be reading too much into this China visit. Maybe my imagination is being overly active. Besides, it is not beyond the fiscal nature of our government officials to travel with large delegations (even on non-importance trips).

Back to the email fraud.

The FG recently issued a stern statement talking about going after arbitrageurs and speculators with the full wrath of the law, in hopes of reducing the demand pressures on fx; meanwhile, at the apex bank, the dollar supply was dwindling out of sloppiness.

What gives?

UPDATE: 12th April, 2016

Bilateral currency arrangements were actually in the works. CBN signed an agreement today with Industrial & Commercial Bank of China. Details of the agreement are still sketchy but below is a direct quote from the Director General of the foreign ministry’s African affairs department, Ling Songtian:

It means that the renminbi (yuan) is free to flow among different banks in Nigeria and the renminbi has been included in the foreign exchange reserves of Nigeria

A framework for currency swaps, between both central banks, was also said to have been agreed.

UPDATE: 3rd May, 2018

Governor Emefiele and newly appointed Governor Yi after signing the currency swap agreement between both countries

It has taken almost two years but the CBN & PBoC finally put pen to paper on the currency swap agreement last week Friday in Beijing. The transaction is said to be valued at $2.5bn. At some point, it was opined to have fallen through because of how long it took considering that this arrangement could have helped with the currency crisis at the time. Maybe the CBN was waiting to be in a better negotiating position. I hoping both parties will share more details of the agreement soon.