What FG must do to make currency swap with China work

Nigeria has renewed its bilateral currency swap agreement with China, six years after the deal was initially struck between both countries. The Central Bank of Nigeria (CBN) and the People’s Bank of China (PBOC) announced the renewal of the arrangement recently, with the agreement amounting to N3.28 trillion, equivalent to approximately 15 billion yuan or […]

Nigeria has renewed its bilateral currency swap agreement with China, six years after the deal was initially struck between both countries.

The Central Bank of Nigeria (CBN) and the People’s Bank of China (PBOC) announced the renewal of the arrangement recently, with the agreement amounting to N3.28 trillion, equivalent to approximately 15 billion yuan or $2.09 billion.

This was coming six years after the apex bank 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.

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The deal was intended to reduce the demand for US dollars by Nigerians importing from China and consequently strengthen the value of the naira.

As of the time the deal was signed, Nigeria-China trade relations was about $15bn annually while the exchange rate was N330 to one dollar.

Internationalisation of Chinese yuan

China is ramping up efforts to boost the yuan’s appeal as an alternative currency in international trade and as a reserve currency in the face of US dollar hegemony.

From South America to the Middle East, countries are finding ways to sidestep the long-dominant American currency in lieu of China’s yuan.

Since 2009, China has signed currency swap agreements with numerous countries and regions such as Argentina, Belarus, Brazil, Canada, ECB, Hong Kong, Iceland, Indonesia, Malaysia, Singapore, South Korea, Thailand, the United Kingdom, Uzbekistan and Tajikistan.

On November 20, 2023, the People’s Bank of China and the Saudi Arabian Monetary Authority signed a currency swap of US$6.98 billion for three years.

Deal failed to stabilise naira six years after

While expectations were high as to the prospect of the currency swap deal stabilising the naira, the local currency has experienced the depreciation never seen in two decades within the six years of agreement.

According to analysts, the deal was never followed through because even availability of yuan was an issue despite the currency swap deal.

“It (yuan) was not an option across the trading window as of then and the mode of operation was also not very clear thus it led to its abandonment,” Lead economist and enterprise partner at SPM Professionals, Paul Alaje, said.

From 2018 till date, the naira-to-dollar exchange has increased by over 473 per cent going by the present exchange rate. The local currency has experienced a free fall since the CBN adopted a unified exchange rate in 2023.

No clear resolution between CBN, the People’s Bank of China – Ex-Chinese envoy

In an interview with Daily Trust in March 2024, the immediate past Chinese Ambassador to Nigeria, Mr Cui Jianchun, said: “I am somewhat disappointed that there has not been a clear resolution between the two central banks, namely the Central Bank of Nigeria and the People’s Bank of China.

“Chinese and Nigerian businessmen face challenges in terms of trade between the two countries. Currently, Chinese businesses need to use the Yuan to purchase dollars before importing goods from Nigeria, and similarly, Nigeria needs to use the Naira to buy dollars before importing from China, leading to bureaucratic hurdles.

“I engaged in discussions with the former CBN administration on the possibility of direct trade in our local currencies, utilising the Yuan and Naira. The idea was for Nigerian individuals to buy goods from China in Yuan, while Chinese buyers could purchase Nigerian products like oil, gas, raw materials and finished goods using the naira.

“Initially, the Buhari government was keen on implementing the currency swap; however, a change in plan by the federal government through the CBN halted progress, necessitating a period of waiting.”

He opined that there is still the potential to negotiate and finalise the currency swap deal under the Bola Tinubu administration.

He disclosed that discussions were underway for CBN officials to visit Beijing to advance the currency swap agreement.

He said: “Money serves not only as a medium for trade and investment settlement but also as the country’s reserve. With various currencies like US dollars, euros, pounds and the Chinese yuan in circulation, I am optimistic that we can soon conclude the currency swap deal due to China’s significant trade relationship with Nigeria, compared to that of the Americans or Europeans.

“We need the cooperation of both central banks. The next step involves allowing the Nigerian side to join the Chinese system, SIPs, followed by establishing payment systems and receiving support from commercial banks.

“The Chinese central bank and the ICBC are collaborating with the Nigerian side. I can assure you that in a not-too-distant future we can achieve the currency swap. A new currency system is necessary due to the weaponisation of the US dollars by the United States of America.”

Any hope in sight?

The new currency swap agreement, which is valid for a period of three years, retains the option for further renewal based on mutual consent between the two central banks.

This mechanism has proven beneficial for both nations, providing a framework for financial collaboration that simplifies transactions involving the Nigerian naira and the Chinese yuan.

By renewing this agreement, both countries aim to expand the use of their respective currencies in international trade, reducing dependency on third-party currencies like the US dollar.

According to the statement released by the People’s Bank of China, the renewed arrangement is expected to significantly bolster bilateral trade and investment between the two economies.

The currency swap provides businesses in both countries with greater ease of access to local currencies, thereby reducing transaction costs and streamlining trade processes.

This move aligns with the broader objective of enhancing economic cooperation between China and Nigeria, two countries that share strong commercial and diplomatic relations.

Furthermore, the agreement reflects a strategic effort to encourage the internationalisation of the Chinese yuan while simultaneously promoting the Nigerian naira’s stability in global financial markets. This collaboration is part of a larger trend where countries are exploring alternatives to traditional trade settlement methods, thereby fostering a more inclusive and diversified global financial system.

“Through initiatives like this, both nations aim to create a conducive environment for sustainable economic growth and development,” China said.

Alaje speaking further on the new agreement stated that people that signed it thought it was “a silver bullet that once we have it, we would not need dollars again. That is not true.”

“That yuan or whatever currency is already tied to the dollar. Our own too is tied to the dollar. It will just reduce availability which is good that we are signing it again. But it does not insulate us away from the rest of the world. But availability concerns, which contributes to inflation or loss of confidence in the naira will reduce,” he said.

The economist said for the new agreement to work, the government must make the yuan available.

“It has to do with the government making it available the way we make dollars available to those who want to do business, especially in China, making it an option across the board, across the trading window…. The thing is if we make it an option, it will really promote and facilitate trade better. But it is a good development,” he added.

The Director/CEO, Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, in a chat with Daily Trust said while renewing the agreement was a welcome development, the amount involved was too infinitesimal compared to the trading volume between Nigeria and China.

He said, “This currency swap is just about $2bn over three years. In a trade relationship that is about $23bn annually, it would not have significant impact. Symbolically it may be good but when you relate the amount involved to the total amount of trade, it is insignificant.”