Nigeria’s five-year-old currency swap agreement with China has failed to ease the pressure on the naira, according to reports from economic experts. The agreement, signed between the Central Bank of Nigeria (CBN) and the People’s Bank of China (PBOC), was designed to reduce pressure on Nigeria’s external reserves and ensure foreign exchange stability. However, the currency swap arrangement has not had the desired effect, with the naira depreciating against the dollar from N305:$1 in 2018 to over N460:$1 in early April 2023. The trade imbalance between the two countries has caused the implementation of the arrangement to be challenging since Nigeria imports a lot from China, but does not export nearly as much. Taiwo Oyedele, the head of tax and corporate advisory services at PWC Nigeria, attributed this failure to the relative instability in the value of the naira, adding that the government can still substitute or promote locally produced alternatives to imports.
The signing of the currency swap agreement in 2018 was seen as a major milestone in Nigeria’s relationship with China. The arrangement was expected to provide Nigeria with renewed access to Chinese imports while also shoring up the value of the naira.
However, since the signing of the agreement, the naira has been under immense pressure, with its value declining against the dollar and other currencies. Although the swap arrangement was intended to address some of these challenges, it appears to have fallen short of achieving this goal. Reports indicate that the swap arrangement has failed to support the naira, which remains vulnerable to market pressures.
The increasingly worrying situation comes as several countries worldwide have established similar currency swap arrangements with China. These agreements are meant to address financial challenges that arise due to currency fluctuations, such as inflationary pressures, trade deficits, and external reserve concerns.
Experts have cited the trade imbalance between Nigeria and China as a key reason why the currency swap is failing. According to available data, Nigeria imports more from China than it exports, leading to significant trade deficits. The relatively stability of the naira’s value only compounds this situation, making it challenging for Nigeria to achieve parity with China.
Taiwo Oyedele, a financial expert based in Nigeria, has pointed out that the Nigerian government can only solve this challenge by promoting locally produced alternatives to imports. One way of doing so is by investing more in key sectors of the economy, such as agriculture, manufacturing, and commerce.
Another expert, Kola Ayeye, has suggested that Nigeria must first ensure that its economy is operating efficiently before engaging in significant trade agreements. “We need to make sure the Nigerian economy is strong and that we don’t have to depend on other countries,” Ayeye told the media. “We must strengthen our local markets and provide local businesses with the necessary support to compete with foreign firms.”
Meanwhile, the Nigerian government has assured citizens that it will continue to explore various options to address the challenges facing the country’s currency market. These options include exploring new trade arrangements and debt financing options with other countries and international organizations.
In conclusion, the Nigerian currency swap agreement with China has fallen short of meeting its objectives, leaving the naira vulnerable to market pressures. With experts suggesting that the key challenge is the trade imbalance between the two countries, Nigeria has to promote locally produced alternatives to imports to rebalance this situation. The government must also take steps to support the development of key economic sectors to reduce the reliance on foreign imports. Ultimately, Nigeria must address these challenges head-on to ensure long-term economic stability.
