Financial analysts predict that Nigeria’s renewed bilateral currency swap agreement with China will bolster the naira’s value through increased demand by 2025.
Recent data from the Central Bank of Nigeria (CBN) shows the naira trading at N1,535 per dollar on Friday, compared to N1,537 on Tuesday, reflecting its strengthening against the dollar in the Nigerian Foreign Exchange Market (NFEM).
The agreement, valued at N3.28 trillion, is set to last for three years, with the possibility of extension based on mutual consent. Since its commencement in July 2018, significant portions of the agreement have already been utilized and repaid.
The goal of the currency swap framework is to facilitate direct exchanges of the naira and yuan without reliance on the U.S. dollar, aiming to streamline financial transactions between Nigeria and China while reducing transaction costs for businesses in both nations.
Commenting on the implications of the swap, Ayodele Akinwunmi, senior relationship manager at FSDH Merchant Bank, emphasised the potential of the deal to stabilise the naira.
“The initiative to conduct trade transactions between Nigeria and China using the yuan, instead of the U.S. dollar, has the potential to strengthen the naira. The logic is straightforward as it shifts a significant portion of Nigeria’s trade with China from the dollar to the yuan, reducing the demand for dollars. When demand for a currency decreases while supply remains constant, its value depreciates relative to other currencies, leading to an appreciation of the naira.”
Akinwunmi noted that proper implementation and adherence to agreements are critical to the success of this policy. He noted, “While this initiative has been in place for six years, its impact has been limited by systemic issues. However, under the current administration, there are promising signs of improvement. Fiscal and monetary authorities are working to ensure transparency and discipline in the foreign exchange market.”
Tilewa Adebajo, chief executive officer of The CFG Advisory, said China is Nigeria’s largest trading partner. According to him, imports value last year was about $23 billion, which is significant.
“With that amount of money, you can see that we need more availability of the Chinese currency in the system instead of chasing dollars. Dollar demand is not properly priced,” he said.
Despite the optimism, Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise (CPPE), pointed out that the overall impact of the currency swap is minimal. He explained, “Over 90 percent of our trade is still conducted in dollars. Even Chinese exporters often demand payment in dollars. The volume of trade conducted in naira is less than five percent of our total trade, and trade with China accounts for an even smaller proportion, probably less than two percent.”
Yusuf quantified the arrangement’s scale, stating, “We are talking about N3.28 trillion worth of trade over three years, which averages around N1 trillion per year. When converted, that’s less than $100 million annually, a negligible fraction compared to our total trade volume of over $17 billion U.S. dollars. While this initiative is commendable, its material impact on the naira and the exchange rate remains negligible.”
Despite the positive outlook, some experts believe the overall impact of the currency swap on Nigeria’s trade volume and exchange rate may be limited, largely due to the dominance of the dollar in international trade transactions. Nonetheless, the agreement is seen as a step towards fostering economic cooperation and stability in bilateral trade between Nigeria and China.
