The Nigerian economy has been under immense pressure, and experts have revealed that the country’s five-year-old currency swap agreement with China has failed to ease the situation. The swap arrangement, signed between the Central Bank of Nigeria (CBN) and the People’s Bank of China (PBOC), was intended to reduce pressure on Nigeria’s external reserves and to ensure foreign exchange stability. However, since the signing of the agreement in 2018, the naira has depreciated against the dollar from N305:$1 to over N460:$1 in the first week of April 2023. Against the yuan, the Nigerian currency slid from the 2018 exchange rate of N48:CNY1 to N66.70:CNY1 on April 6, 2023.
The failure of the currency swap arrangement has been attributed to the size of the trade imbalance between Nigeria and China. Taiwo Oyedele, the head of tax and corporate advisory services at PWC Nigeria, explained that the implementation of the swap arrangement has been a challenge due to the trade imbalance between the two nations. Nigeria imports a lot from China, but it does not export nearly as much, which has been on the decline. Oyedele suggested that Nigeria could remedy this situation by substituting or promoting locally produced alternatives to imports.
The currency swap arrangement’s failure comes at a time when several countries have established or are seeking to establish similar arrangements with China. These countries hope to reduce their reliance on the US dollar and to facilitate trade with China. However, the Nigerian experience shows that currency swap arrangements may not be a panacea for all economic problems.
The naira/dollar exchange rate on the foreign exchange parallel market reportedly stood at over N730:$1, making it a key source of the greenback for many Nigerian businesses and individuals. The high exchange rate has made it difficult for businesses to import goods, and this has contributed to the country’s inflationary pressures.
In conclusion, the failure of the currency swap agreement between Nigeria and China has not eased the pressure on the naira. The trade imbalance between the two countries has been identified as the main reason for the agreement’s failure. Nigeria needs to promote local production to reduce its reliance on imports and to improve its trade balance. Currency swap arrangements may not be a panacea for all economic problems, and countries should carefully consider the implications before entering into such agreements.