Why the Nigeria-China currency swap deal has failed to stabilize the naira

The five-year currency swap deal between Nigeria and China, aimed at reducing the demand for the United States dollar (USD) to stabilize the Nigerian naira, has failed to ease the pressures on Nigeria’s exchange rate and external reserves.

Key details

• The Central Bank of Nigeria (CBN) signed a bilateral currency swap agreement with the People’s Bank of China (PBoC) in 2018.
• Worth about $2.4 billion (N720 billion and CNY15 billion in local currencies), the deal was intended to reduce pressure on Nigeria’s external reserves and to ensure foreign exchange stability.
• The currency swap deal was also expected to reduce the demand for the USD and reduce import barriers for Nigerians who import goods from China.
• However, exchange rate pressures have remained persistent since the agreements. The naira-yuan exchange rate depreciated to N66.70 this month, compared to N48 per yuan in 2018. The naira also declined against the dollar from N305 in 2018 to N460 a dollar in April 2023.
• The currency swap deal, renewed for another 3-year term in April 2021, has recorded N436.7 billion (CNY7.04 billion) from 2018 to June 2022.

What they’re saying

• Taiwo Oyedele, head of tax and corporate advisory services at PwC Nigeria, cited by the Nigerian newspaper Businessday, said the bilateral currency 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.

• Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, also cited by Businessday, pointed out that the agreed currency swap is only a portion (12%) of the total trade volume between Nigeria and China.

“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.”

Why it matters

• A currency swap is an agreement between two parties to exchange cash flows in different currencies at some predetermined rates for a specified period.
• To promote the international use of the Chinese Yuan (CNY), the PBoC signed bilateral currency swap deals with other central banks that share the same interest.
• Other African countries with bilateral currency swap deals with China include South Africa, with a $4.75 billion swap agreement signed in 2015, and Egypt, with a $2.62 billion swap agreement.