ECONOMIC ANALYSIS OF THE NIGERIAN CURRENCY SWAP – WRITTEN BY OLADELE ABIGAIL 

ECONOMIC ANALYSIS OF THE NIGERIAN CURRENCY SWAP

WRITTEN BY OLADELE ABIGAIL

On the 3rd of May, 2018, the Central bank of Nigeria (CBN) and the People’s Bank of China (PBOC) finalized a bilateral currency swap agreement between both banks. The agreement is valid for three years and can be extended upon mutual consent. The deal will allow an amount of Fifteen Billion Renminbi/Chinese Yuan (CNY 15 Billion) for Seven Hundred and Twenty Billion Naira (NGN 720 Billion).

WHAT IS A CURRENCY SWAP DEAL?

According to the Central bank of Nigeria, a currency swap is a bilateral agreement between two nations to exchange cash flows in their currencies at a predetermined rate for a specific period. That is, it is a contract to exchange at an agreed future date principal amounts in two different currencies at a conversion rate agreed at the onset. There are three types of currency swap; the fixed currency swap, the fixed-floating currency swap andthe floating-floating currency swap.

INTRODUCTION

An economy could either be closed or open. Operating in the former would be nearly impossible. Every nation does not have all the resources it needs to be independent; hence, the need for international trade. China is no doubt one of Nigeria’s largest trading partners. Looking at the growth in trade volume between both countries, Prof. Chukwuma C. Soludo, CFR, a past CBN governor opted for a swap deal between both countries so as to increase Nigeria’s foreign reserves from 2% to 7%.

Basically, the whole process was to provide easy access to liquidity for business and more importantly, to reduce and possibly eliminate the huddles and stress in obtaining dollars for trade between Nigeria and China. After various years of reviews and negotiations, on Friday, 27th April, 2018, the CBN Governor, Mr. Godwin Emefiele, led officials of the apex bank, while the PBOC Governor, Dr. Yi Gang, led the Chinese team to the signing ceremony of the currency swap, which was held in Beijing, China.

ECONOMIC ANALYSIS AND OPINION

More than 50 percent of Nigeria’s import comes from China while only about 12 percent comes from the United States of America. The currency swap between both countries is significant in many ways. This development will improve trade between the two countries and will attract more foreign direct investment inflows into the country. In accordance with apriori expectation, this will have a positive effect on the nation’s economic growth as there will be more employment prospects, infrastructural development, modern technology and Nigeria will gain from the technical know-how of her partner.

Also, the elimination of the middleman (dollar) for transactions in both countries will help to boost Nigeria foreign reserves as it will help to reduce the pressure on Nigeria’s foreign reserve which is denominated in dollars. The CBN spokesman, Mr Okafor in his statement said that this development will reduce the difficulties encountered in the search for third currencies in the execution of business transactions between Nigerian and Chinese industrialists and would provide naira liquidity to Chinese businesses and provide RMB liquidity to Nigerian businesses, thereby improving the speed, convenience and volume of transactions between both nations. “It will also assist both countries in their foreign exchange reserves management, enhance financial stability and promote broader economic cooperation between the two countries,” he added.

Looking at the other side of the coin, Parties are prone to credit risk as one or either party could default on interest and principal payments, this is nearly impossible as the contract is legally binding. However, Nigerians have a huge appetite for imported goods and with the currency swap deal, domestic production will be reduced, local and small businesses will find it hard to thrive as they have to compete internationally. This may also encourage dumping of goods especially consumable goods in the country and in the long run, exports may reduce and would affect the revenue been generated in Nigeria leaving China to enjoy the benefits of the deal.

To conclude, every policy has its advantage and disadvantage however; the disadvantage can become an advantage if there are proper checks. As this development is beneficial to Nigeria, the policy makers and those responsible should be cautious enough. The currency swap will of course, look so beautiful and beneficial to the country in the short run but if not properly checked, it could be a disadvantage.

Proper and constant checks should be done so as to avoid dumping of goods into the country. It is commendable that the Federal government already banned forty-one products and goods from entering into the country, the government should however, not relent but to increase its efforts to prevent smuggling of goods and other economic activity that are not beneficial.

 

Written by Oladele Abigail 

 

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Oladele Abigail, an economics graduate of Bowen University who applies her passion for writing to her career path.

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