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How Mainstreaming RMB Assets can Address Nigeria Forex Shortage

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SOLA FANAWOPO

Any system that removes the need to first source for the “greenback” (US Dollars) before payments for transactions involving Nigeria and China will substantially address the problems of Forex shortage in the country.

In other words, any deal that allows trading between Nigeria and China directly in their local currencies without any need for the dollar, and enables the Renminbi (Yuan) to flow freely within the Nigerian banking system should be the priority of the Central Bank of Nigeria (CBN).

Why the CBN has not implemented this is hard to relate with, considering the challenges Nigeria is experiencing with Forex shortage.

The significant cut on dollar demand by firms and investors doing business across these two countries will not only help to protect the Nigerian financial markets but also boost the foreign reserves.

China responsible for bulk of Nigeria’s import

China is responsible for the bulk of imports into Nigeria, ranking number one on the list of top 10 countries in the last five quarters.

Nigeria’s imports from China rose by 183.91 percent from N530.98 billion in the first quarter of 2018 to N1.51 trillion in Q1 2022.

According to reports, Nigeria was the 4th largest trading partner of China in Africa in 2011, and in the first 8 months of 2012, it was the 3rd.

Nigeria, China Currency Swap Deal

In April 2018, Nigeria signed a $2.4-billion currency swap deal valid for 3 years. In 2019, bilateral trade between China and Nigeria reached $19.27 billion.

However, there are concerns as to the potency of the Currency Swap Agreement to fully address the challenge of dollar demand by importers, since the value of the currency swap deal covers only few percent of Nigeria’s annual total imports.

The current annual import bill of Nigerian enterprises moving goods into the country from China reportedly stands at NGN 1.7 Trillion1, meaning that the swap deal amount of NGN 720 Billion can only take care of about 15 percent of Nigeria’s annual total imports from China.

The remaining 85 percent will definitely still require dollars. Enabling Yuan to flow freely within the Nigerian banking system. To address the shortfall, CBN should have enabled the Renminbi (Yuan) to flow freely within the Nigerian banking system just like the Dollar.

The apex bank should grant banks regulatory approvals to enable their customers to open Yuan accounts just as they freely open Dollar-denominated accounts today.

Renminbi-denominated assets

Renminbi-denominated assets remain a strong magnet for international investors amid sound long-term prospects and China’s continuous efforts to open its financial market.

More than 60 percent of surveyed overseas financial institutions will increase their holdings of RMB-denominated assets, a recent white paper from the Bank of China said, citing a survey covering over 3,400 enterprises and institutions globally in 2021.

The proportion increased by 9 percentage points compared with the 2020 survey, the white paper said.

Echoing the white paper, official data have revealed that global investors showed increasing interest in pursuing RMB-denominated assets to diversify their investment portfolios over the past few years.

From 2018 to 2021, the total net increase in holdings of domestic stocks and bonds by global investors exceeded $700 billion, with an annual growth rate of 34 percent, data from the State Administration of Foreign Exchange showed.

RMB accounts for only 2.79 percent of global forex reserves and foreign investors’ holdings in China’s stock and bond markets stand at a relatively low level of 3 percent to 5 percent.

Renminbi settlement in cross-border e-commerce

Nigeria can also take advantage of China’s latest move to encourage Renminbi settlement in cross-border e-commerce.

The People’s Bank of China recently published a circular that improved policies for cross-border renminbi settlement in e-commerce and other new modes of foreign trade to better serve the real economy and facilitate trade and investment.

The circular, effective July 21, has enlarged the scope of transactions eligible for cross-border renminbi settlement that involves payment institutions from goods and services trade to all transactions under the current account.

It detailed requirements for banks and payment institutions to carry out the settlement services and specified arrangements for authenticity verification and anti-money laundering.

Experts said the circular provides more detailed rules concerning cross-border renminbi settlement while enlarging the scope of eligible transactions. This will help meet the growing demand for cross-border renminbi settlement from foreign trade companies in the face of greater flexibility in the currency’s exchange rate, they said.