CBN to release $2.5bn currency swap framework next week
The Central Bank of Nigeria will next week release the framework that will guide the implementation of the $2.5bn currency swap deal between Nigeria and China.
The CBN Governor, Mr. Godwin Emefiele, confirmed this while speaking to journalists on Tuesday shortly after the two-day Monetary Policy Committee meeting held at the apex bank’s headquarters in Abuja.
The currency swap agreement was signed on April 27, after two years of painstaking negotiations between the CBN and the People’s Bank of China.
The transaction, which is valued at Remnibi 16 billion, or the equivalent of about $2.5bn, is aimed at providing adequate local currency liquidity to Nigerian and Chinese industrialists and other businesses.
Emefiele dismissed fears that the agreement would have any negative effect on the Nigerian economy.
He argued that the pact would reduce the pressure encountered in the search for third currencies in the execution of business transactions between Nigerian and Chinese industrialists.
Among other benefits, he said the agreement would provide naira liquidity to Chinese businesses and provide Remnibi liquidity to Nigerian enterprises.
This, he noted, would help to improve the speed, convenience and volume of transactions between the two countries.
Emefiele explained that already, the apex bank had shortlisted two lenders as settlement banks for the implementation of the currency swap deal. The banks are Stanbic IBTC and Standard Chartered Bank.
The CBN governor stated, “The currency swap deal is going to be positive for Nigeria, Nigerian imports and Nigerians; and we will ensure that we achieve that. It was a negotiation that was painstakingly done and I am optimistic that Nigeria will reap the positive impact from this.
“We do expect that by the time the framework is released, Nigeria will end up being the Reminbi hub of West Africa sub-region, because there are only three countries in Africa that currently enjoy the currency swap deal with China. They are South Africa, Egypt and Nigeria.
“We plan to release the framework for this by next week and the settlement banks have been chosen. The settlement banks will be Standard Chartered Bank and Stanbic Bank that has its own affiliate bank, that is Investment and Commercial Bank of China, that will be the corresponding bank at the Chinese end.”
He also said the Monetary Policy Committee frowned on the low funding of the real sector by the Deposit Money Banks and called on the apex bank to come up with innovative ways to channel funding to the sector.
To achieve this, he explained that the apex bank would soon come up with guideline’s that would relate loan deposit ratio of banks with their level of cash reserves.
This, according to him, will be used as a tool to compensate a bank that has done a lot of work in boosting its loan deposit ratio with the Cash Reserves Ratio.
He explained that those banks that preferred to keep their liquidity in order to trade in government securities rather than lend to the real sector of the economy would be penalised.
Emefiele added, “We will try as much as possible to come out with some prudential guidelines that will relate the loan deposit ratio with the level of cash reserves that the banks hold so as to direct a bank or compensate a bank that has done a lot of work in boosting its loan deposit ratio through compensating them with the Cash Reserves Ratio, and penalise those who prefer to keep liquidity and trade in government securities or direct those to the foreign exchange market rather than lend to the real sector.
“That framework will certainly come up and we have asked our relevant department to work on it and I am optimistic that the Monetary Policy Committee will take that decision in the near term.”
On the decision of the MPC, the CBN governor said the committee at the end of its meeting left the Monetary Policy Rate unchanged at 14 per cent.
He explained that eight out of the nine members of the committee who attended the meeting agreed to maintain the current monetary policy stance.
He said the other one member of the MPC voted that the rates be increased.
Emefiele stated that apart from the MPR, the committee also retained the Cash Reserves Ratio at 22.5 per cent.
Also retained were the Liquidity Ratio, which was left at 30 per cent; and the Asymmetric Window, which was left at +200 and -500 basis points around the MPR.
Emefiele put the total foreign exchange inflow into the economy between January and March this year at $24.71bn.
Out of this amount, he said funding from the CBN was $8.1bn or 28.5 per cent, while autonomous sources accounted for the balance of $15.91bn or 71.5 per cent of the total.
He stated that the committee called for the speedy implementation of the 2018 budget in order to stimulate economic growth.
Explaining the rationale behind holding the monetary policy parameters, Emefiele said the committee considered the forecast of high liquidity injection in the second half of 2018 and upward pressure on prices driven largely by substantial fiscal policy, which could arise from the late passage of the budget.
According to him, the outstanding balance from the 2017 budget and the pre-election expenditure are other factors that made the committee to retain the current monetary policy stance.
He said if interest rate was raised, it would increase the cost of borrowing and reduce the amount of credit to the real sector, adding that such a policy would make the DMB to reprice their assets.