The Chinese Yuan swap deal can be reopened to combat the threat as Nigeria battles excessive inflation, analysts have suggested.
On April 27, 2018, Nigeria and the People’s Republic of China held a ceremony in China to officially sign the three-year agreement.
The $2.4 billion exchange agreement aims to strengthen connections and lessen the need for dollars in bilateral commerce.
The currency swap agreement was specifically made to finance trade and investment between China and Nigeria, preserve the integrity of the financial system, and promote other related goals that might be agreed upon by both countries.
It aimed to provide a platform that offered naira to Chinese businesses and investors interested in doing business with Nigeria and Chinese yuan to Nigerian businesses and investors interested in doing business with China.
Experts claimed that such an agreement might be negotiated with nations that conduct substantial commerce with Nigeria, adding that it would lessen the pressure on the dollar and, consequently, control inflation.
According to the agreement, both the CBN and the PBoC were required to make liquidity in their respective currencies available (subject to the maximum amount specified under the Currency Swap Agreement) in order to facilitate and promote trade and investment between the two nations. This was done through the purchase, sale, and subsequent repurchase and resale of the Chinese Yuan against the Naira and vice versa.
Despite the issues brought up, experts think that such partnerships are moving in the right path. By reducing instances of dollar shortage and currency rate volatility, the swap arrangements’ predicted drop in dollar demand will complement the CBN’s present intervention through the Investors’ and Exporters’ (I & E) FX Window and further stabilize the market.
Additionally, these agreements will be especially advantageous for Nigeria’s foreign reserves, which have been steadily declining in part because of the unrestricted oil theft in the Niger Delta region.
The Central Bank of Nigeria must split its reserve management program by sending 50% of its reserves to the People’s Bank of China in order to finance the $12.88 billion in annual imports without using the US dollar as a swap currency, according to Kelvin Ayebaefie Emmanuel, Chief Executive Officer at Dairy Hills Limited. This is similar to the April 2018 Naira Yuan swap agreement that fell through due to a lack of liquidity to support settlements. As China now accounts for the largest portion of Nigeria’s bilateral trade, this will ease the pressure on form M demand.
He asserted that the Central Bank of Nigeria must stop its quantitative easing (QE) policy, which has increased lending above 10% of GDP, in order to control inflation.
Additionally, he promoted a significant backward integration initiative in crucial industries where Nigeria had a competitive advantage.
Nigeria spent N425 billion importing raw, unfortified sugar in 2021, and it only produced 41,500 metric tons, the lowest production output to import ratio among the five sub-Saharan African nations studied.
He argued that putting into practice the sugar masterplan created by the NSDC based on Cap 88 of LFN as amended in 2015 will allow Nigeria to produce in the four phases above 1.6 million metric tonnes – current annual consumption – to becoming a net exporter, which is essential to saving $1 billion in imports. Nigeria currently imports $65 billion worth of goods annually, including cars, petroleum derivatives, and other goods.
He made hints that a negative current account balance, a lack of liquidity from an exchange rate subsidy program that doesn’t give manufacturers a forward curve to buy raw materials or repatriate profits, and a decline in foreign direct investments and foreign portfolio investments caused by uncertainty in the ratio of external risk to internal rate of return are all contributing factors to the falling value of the naira.
Nigeria’s ability to purchase dollars is dependent on receipts from the sale of crude, remittances, and NXP profits.
In order to save $9 billion and increase on limited foreign exchange revenues under Direct Sale Direct Purchase (DSDP) for Premium Motor Spirit, Emmanuel revealed that Nigeria can avoid the impending catastrophe by concentrating on designing a subsidy removal program in four phases that will be implemented every six months (PMS).
The Federal Government should call a meeting of the National Economic Council and request that the Excess Crude Account be collapsed into both the Consolidated Revenue Fund (based on sections 162 (1) of the LFN) and Sovereign Wealth Fund, in order to increase the government’s revenue to GDP ratio and lower the curve for inflation. Nigeria should also remove the peg on rates by adopting a floating exchange rate mechanism as a means to converge the various rates in the markets.
Currency swap agreements could be significant in several ways, according to economist Samuel Ajagun.
In addition to eliminating the need for the dollar in trade between Nigeria and other nations, he said that these agreements will allow local currencies to circulate freely within the Nigerian financial system.
This move will boost bilateral trade between Nigeria and the nations it enters such agreements with and has the potential to spur inflows of foreign capital and productive economic collaboration. The large decrease in dollar demand from businesses and investors operating in the concerned nations will help to safeguard those financial systems and increase their individual foreign reserves, he said.
The experts were quick to point out that since Nigeria imports from numerous nations, questions still remain over the currency exchange deal’s ability to adequately handle the issue of excessive dollar demand.
