Nigeria on Tuesday agreed a currency swap deal with China, officials said, as it looks for ways to shore up its ailing currency and fund a record budget deficit, possibly by issuing yuan-denominated bonds in China.
The West African nation is facing its worst economic crisis in decades as sinking oil prices eat into its foreign reserves and the naira weakens against other currencies.
Nigeria has been for months looking for sources to help plug a projected 2016 deficit of 2.2 trillion naira ($11.1 billion) as President Muhammadu Buhari plans to triple capital spending.
During Buhari’s visit to Beijing, the Industrial and Commercial Bank of China Ltd (ICBC), the world’s biggest lender, and Nigeria’s central bank signed a deal on yuan transactions.
“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,” Lin Songtian, director general of the African affairs department of China’s foreign ministry, told reporters.
The agreement was reached following a meeting between Buhari and Chinese President Xi Jinping.
The move comes after Finance Minister Kemi Adeosun said on Saturday that Nigeria was looking at panda bonds – yuan-denominated bonds sold by overseas entities on the mainland -saying they that would be cheaper than Eurobonds.
Nigeria’s central bank has said it plans to diversify its foreign exchange reserves away from the dollar by switching a stockpile into yuan. It converted up to a tenth of its reserves into yuan five years ago.
Lin said a framework on currency swaps has been agreed with Nigeria, making it easier to settle trade deals in yuan. China has signed currency swap deals with countries ranging from Kazakhstan to Argentina as it promotes wider use of its yuan.
Beijing also signed agreements to develop infrastructure in Nigeria, part of a drive to deepen its ties with Africa.
ICBC signed a $2 billion loan deal with Dangote group, the company owned by Africa’s richest man, Aliko Dangote, to fund two cement plans it plans, he told Reuters.
China’s official Xinhua news agency cited President Xi as telling Buhari that there was huge potential for economic cooperation, naming oil refining and mining.
In a speech to business leaders, Buhari said both countries wanted to work together in the areas of agriculture, fishing and the manufacturing of cars, construction materials and textiles.
Aly Khan Satchu, a portfolio manager at Rich Management, said the deal would pave the way for panda bonds but this would not be enough to ease pressure on the naira.
Buhari has rejected calls to devalue the currency.
“Nigerian FX policy remains the elephant in the room and China or a panda bond is not going to be enough to stop what will eventually become a tsunami of a devaluation,” he said.