Nigeria-China Currency Swap: What’s in It for Nigerians?

Nigeria’s central bank last week signed a $2.5 billion currency swap agreement with the People’s Bank of China to facilitate trade between the two countries and enhance foreign reserve management.
Recall, on April 13, 2016, the Nigerian Apex Bank and the Industrial and Commercial Bank of China Ltd (ICBC) signed a currency swap deal on behalf of both countries. On the part of the Nigerian government, the main objective is to ease off the encumbrances of the high exchange rate which was heightened by the country’s high volume of imports.

Nigeria suffered a chronic dollar shortage after oil prices plunged mid-2014, which tipped its economy into a recession and hammered its currency reserves, frustrating individuals and businesses that could not import goods into the country. According the central bank of Nigeria, the success of the protracted discussions is the third of such with any African nation to agree a currency swap deal with China.

What is Currency Swap?

Currency swap is an agreement between two central banks, at least one of which must be an international currency issuer, to swap their currencies (i.e. to exchange one currency with another, at a specific rate of exchange). The central banks party to the swap transaction can lend the proceeds of the swap, against collaterals they deem adequate, to the commercial banks within their jurisdiction, to provide them with temporary liquidity in a foreign currency.

Nigeria-China currency swap has the potential of shoring up the value of the nation’s currency, in the foreign exchange market, through a concomitant emergent bidding scheme, with strategic reduced demand for dollar and other major currencies, other than the yuan.

The currency swap deal is expected to address, on a short-term basis, the liquidity challenge in the nation’s foreign exchange market. With the currency swap, depending on the value, a significant portion of Nigeria’s import bills from China would now be denominated and settled in yuan, thereby reducing the demand for dollar by Nigeria’s importers.

Ultimately, the deal will impact on the upward review of Naira value, with the expected ease on the pressure on the dollar, it would bring down the value of the dollar in relation to the naira, which would now make it possible for American investors to invest in the Nigerian economy again.

However, the juicy deal is not without drawbacks, as the currency swap policy might bring about an unrestricted access to yuan, at an overvalued naira exchange rate that will certainly encourage importation and stifle local production of goods.

Experts called that Government should try and incorporate a strategy similar to that of the cement industry policy, which would require some of the imports from China to be produced locally after a defined timeline, particularly if Nigeria has relative manufacturing advantage for such products. Examples that can readily come to mind include textiles, plastics, ceramics, among others.

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