Nigeria’s central bank plans to shift more of its $43 billion of reserves into yuan from dollars, the deputy governor said today, as the Chinese currency gains greater prominence in global trade.
The bank will increase the yuan’s share of reserves to as much as 7 percent from 2 percent now, Kingsley Moghalu said in an interview in London, without specifying a timeframe for the change. About 85 percent of Nigeria’s reserves are held in dollars, he said.
“It was clear to us that the future of international economics and trade will shift in large part to business with and by China,” Moghalu said. “Ultimately,the renminbi is likely to become a global convertible currency.”
Nigeria is joining countries including South Korea in adding the yuan to reserves as China opens up its capital market and promotes the use of the currency in international trade and financing. Africa’s biggest oil producer also removed import restrictions on the dollar to support the naira, Moghalu said. The local currency has fallen 1.2 percent this month versus the dollar, after slumping 2.6 percent last year.
The central bank started diversifying its reserves into yuan in 2011 and is working with the People’s Bank of China to boost the holdings as soon as the relevant structures are in place, Moghalu said. Nigeria is also considering a dim sum bond sale, although plans aren’t at an “advanced stage,” he said.
The yuan was the eighth most-used currency for global payment system transactions in December, up from 12th in October, according to the Society for Worldwide Interbank Financial Telecommunication. Policy makers from the U.K., the euro-area and South Korea have signed currency swap agreements with China’s central bank as cities including London, Frankfurt and Singapore vie to become offshore yuan trading hubs.
As of the end of June, the euro accounted for about 6 percent of Nigeria’s reserves, followed by special drawing rights of the International Monetary Fund at 5 percent and the sterling at 2 percent, according to data on the central bank’s website. Gross reserves fell 12 percent from last year’s peak in May to $43 billion yesterday, official data show.
Policy makers drew down reserves partly to help support the naira, which is managed by the central bank. The currency was unchanged in interbank trading at 162.24 per dollar as of 7:42 p.m. in Lagos, the commercial capital, after declining as much as 0.6 percent.
The central bank sells foreign currency at auctions held two times a week to help keep the exchange rate within 3 percent of a midpoint of 155 per dollar.
The bank has “not found it necessary” to increase the midpoint of naira’s trading band, Moghalu said. Keeping its key interest rate at an all-time high of 12 percent for more than two years “has helped a lot to maintain the stability of the naira and to check inflation,” he said.
“We’ll remain in monetary-tightening mode and possibly increase” rates if government spending jumps before elections in 2015, Moghalu said.
To further ease pressure on the local currency, the central bank has lifted restrictions on imports of dollars that were initially imposed to stem money laundering, Moghalu said.
“We are still committed to combating money laundering, but we will do so in a manner that does not create arbitrage opportunities for currency speculators,” Moghalu said. The weak naira “was just a supply-side issue. By removing the restrictions, we’ll be able to address it.”
While expecting the budget deficit will stay within the government’s target of 1.9 percent of economic output this year, Moghalu said the central bank “has positioned monetary policy to intervene with the necessary responses if fiscal spending gets out of hand.”