23 May 2018

Nigeria: Framework for $2.5bn China Currency Swap Coming Next Week - CBN

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Nigeria Naira and China's Renminbi (Yuan)

Governor, Central Bank of Nigeria (CBN), Mr. Godwin Emefiele yesterday said that the framework for the $2.5 billion currency swap agreement with the Peoples Bank of China (PBoC) will be released next week, stressing that the deal will ease pressure in the foreign exchange market.

Meanwhile, the CBN yesterday retained the Monetary Policy Rate (MPR) at 14 per cent, along with all other policy parameters. It therefore left Cash Reserve Ratio (CRR) at 22.5 per cent; Liquidity Ratio at 30 per cent and asymmetric corridor at +200/-500 basis points around the PMR.

Addressing the press at the end of the Monetary Policy Committee (MPC) meeting in Abuja, said that the decision to hold the rate was to allow the monetary authorities see how the implementation of the 2018 budget and other policy measures would impact the economy in the second quarter.

On the currency swap deal with China, Emefiele said, "Currency swap between the Central Bank of Nigeria and the People's Bank of China will ease pressure in the foreign exchange market by the reduction in reliance in a third currency for trade settlement between Nigeria and China."

He added the framework for the deal, which would be released next week, would be the basis for an expanded economic relationship between Nigeria and China.

Retention of MPR

Justifying the decision to hold the rate further, he said, "Raising interest rate would depress consumption and increase the cost of borrowing. Such policy would make Deposit Money banks to re-price their assets.

"Loosening, committee felt, would stimulate aggregate demand through lower cost of credit, nevertheless, it felt it would exacerbate inflationary pressures , cost higher pressure on the exchange rate; as demand for forex increases it can return real rate into negative territory; nominal interest rate could be less than inflation.

"Reduction in the MPR may not necessarily transmit towards market lending rate on account of high cost of doing business. Loosening could worsen the Current Account Balance and could even increase Non-Performing Loans of banks."

Reserves hits $47.79 b

The CBN boss said that the nation's foreign reserves hit $47. 79 billion as at May 18, 2018. He described it as a positive development, which made the country more comfortable to do business with other countries of the world.

Inflation risks

He noted the downsides of the outlook included the late approval and the implementation of the 2018 budget , farmers/herdsmen crises, weak demand associated with salary arrears, contractors unsettled debts and the growing level of the sovereign debt.

He added that the that the injection of the huge 9.12 trillion budget , expenditure towards 2019 elections, monthly FAAC injections approval and implementation of the new national minimum wage and the possibility of a supplementary budget to finance it could have a negative effect on the inflation.

"These would impact aggregate demand and put pressure on domestic prices in the remaining months of 2018 and may dampen the gains already made by the bank in stabilizing prices," he said

Consequently, he advocated an orderly injection of the anticipated liquidity by the fiscal authorities to prevent the negative shock to prices that would derail the positive fragile recovery so far achieved.

Risks of outflows

On risks of capital outflows, Mr. Emefiele said, "Given the CBN interventions, the current level of oil prices and developments in the global economy, we expect rate to remain stable in the foreign exchange market in the near term. However, the bearish signs in the capital market associated with profit taken calls for a calibration of policies to moderate the tempo of capital outflows in an era of capital normalisation in the Unites States. There are already indications of severe attacks on the foreign exchange markets in others emerging economies."

Fiscal buffer and decreased oil export to China

The CBN boss also urged the federal government to take advantage of the current high oil prices to build a fiscal buffer, especially as the future of oil revenue remained uncertain.

He warned that oil export to China could fall in view of the on-going negotiations between the US and China, especially as the US has included energy imports as part of the deal with China.

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