The Nigeria-China currency swap agreement has not curbed the pressures on the exchange rate and external reserves of Africa’s largest economy, as envisaged five years ago.
In 2018, the Central Bank of Nigeria (CBN) signed a bilateral currency swap agreement with the People’s Bank of China (PBoC) worth about $2.4 billion. In local currencies, the swap was worth 15 billion renminbi or N720 billion.
The deal was expected to reduce the demand for US dollars by Nigerians importing from China and consequently strengthen the value of the naira. The deal was aimed at reducing certain barriers for Nigerian importers of goods from China and reduce the cost of transactions in multiple currencies.
The currency swap deal was to reduce pressure on the country’s external reserves and ensure foreign exchange stability.
But the pressure on the exchange rate has persisted at the foreign exchange market since the signing of the bilateral currency agreement.
Consequently, the naira/yuan exchange rate has depreciated to N66.70 against yuan as of April 6, 2023 compared to N48 in 2018 when the agreement was signed.
The naira-dollar exchange weakened by to N460.86/$ as of April 2023 as against N305/$ in 2018, the CBN’s official rate published on its website showed.
The bilateral currency swap agreement between Nigeria and PBoC has recorded N436.67 billion (CNY7.04 billion) from inception in 2018 to June 2022.
According to the CBN, the currency swap agreement, which commenced in July 2018, was renewed in April 2021 for another three-year term.
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Taiwo Oyedele, head of tax and corporate advisory services at PwC Nigeria, said the naira-renminbi swap policy was meant to bypass the use of a third currency, particularly the USD.
“The implementation has so far been a challenge due essentially to the trade imbalance between Nigeria and China. While we import so much from China, we do not export nearly as much, which in fact has been on the decline in addition to the relative instability in the value of the naira,” he said.
Increasing exports from Nigeria to China as well as promoting import substitution in Nigeria for most of the imported items is the most sustainable solution to the issue, according to Oyedele.
Nigeria’s total exports to China between January and December 2022 was valued at N352.43 billion, according to data from the National Bureau of Statistics.
Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, said: “The whole concept of currency swap agreement was that if you want to buy something from China, you can pay in local currency.
“First of all the total amount is small when you compare it with the volume of trade between us (Nigeria) and China. The total amount involved is equivalent to about $2.4 billion over three years. If you look at the volume of trade between Nigeria and China annually, I don’t think it is less than $20 billion.
“The so-called currency swap is not significant enough to move the needle as far as our trade relationship with China is concerned. It is not strong enough. The amount is small compared with the total volume of trade. The preference of the players in international trade is for a currency that is internationally convertible. If I am exporting something to China, I would like to get the dollar because I may decide to buy something from the US or UK or to convert to the parallel market rate.”
Uche Uwaleke, professor of capital market at the Nasarawa State University Keffi, said there has been no significant impact because the size of the currency swap with China was small.
Nigeria’s total merchandise trade stood at N11.72 trillion in the fourth quarter of 2022, indicating a decline of 4.52 percent over the value recorded in Q3 and a slight rise of 0.13 percent when compared to the value recorded in Q4 2021.
Export trade stood at N6.35 trillion, showing an increase of 7.17 percent over the value recorded in the preceding quarter and increased by 10.28 percent over the preceding year’s corresponding period. Also, the share of exports in total trade stood at 54.25 percent in Q4 2022.
By country of origin, imported goods originated mainly from China and were valued at N1.35 trillion, representing 25.26 percent of total imports. This was followed by Belgium with N585.63 billion (10.92 percent of total imports), India with N368.95 billion (6.88 percent), the Netherlands with goods imported valued at N365.28 billion or 6.81 percent, and the United States of America with N319.23 billion (5.95 percent).
