President of Nigeria, Muhammadu Buhari, together with the governor of the Central Bank of Nigeria (CBN) has signed a currency swap deal with the Industrial and Commercial Bank of China Ltd with the aim of strengthening the naira against the dollar.
The currency swap will allow Nigerian business persons and traders to conduct their transactions with the use of the Chinese Yuan Renminbi, as opposed to the use of the dollar.
Almost all of Nigeria’s international trade is done in dollars, hence putting a lot of strain on the naira. By making the Yuan the transaction currency in Nigeria-China trade relations– which makes up for more than 70 percent of Nigeria’s imports– the government hopes to release the pressure on the naira.
In accordance with the currency swap agreement, the CBN is also expected to diversify a large quantity of the Nigerian foreign reserve from the US Dollars to the Chinese Yuan.
“It means that the renminbi (Yuan) is free to flow among different banks in Nigeria, and the renminbi has been included in the foreign exchange reserves of Nigeria,” Lin Songtian, director general of the African affairs department of China’s foreign ministry, told reporters in Beijing a few minutes after the agreement was signed between the Governors of the nations’ reserve banks in the presence of President Buhari and President Xi Jingping of China.
Nigeria is not the first country to have signed a currency swap deal with China, other countries such as Kazakhstan, Malaysia, South Korea, etc had previously signed currency swap deals.
Nigeria is also said to be considering the use of Panda bonds, which are cheaper over Euro bonds.
What Does This Mean For The Average Nigerian?
This currency swap would mean that rather than change the naira to the USD before proceeding to change it to the Yuan, as is the current case, one can just have the naira converted to the yuan directly.
Considering a lot of Nigeria’s trade is done with China, it is expected to reduce the demand for the dollar, and in the long run cause the naira to strengthen.