How currency swap’ll reduce Nigeria’s dollar demand –Analysts

PRESIDENT Muhammadu Buhari’s currency swap and the whopping sum of $6 billion approved for the Federal Government by the Republic of China for financing of infrastructure and the budget deficit have continued to elicit diverse reactions from Nigerians.

The currency swap, which is a derivative trading arrangement where the principal and interest of a local currency is exchanged for the principal and currency of another currency was practically adopted to reduce exchange rate risk in very volatile currency markets like Nigeria’s.

But while some analysts complained the deal could hurt Nigeria when it comes to competition, the Head, Research, SCM Capital Limited, Sewa Wusu, said the inclusion of yuan in Nigeria’s foreign reserves basket was part of government’s diversification strategy, which might be positive for the country to sustain stability should the dollar weaken.

He noted that while the balance of payment situation may improve, Nigeria’s inability to feed China with other exports, apart from crude oil, would count negatively on its balance of trade in the long run.

Wusu, however, insisted that Nigeria should also boost its export capacity in terms of provision of raw materials and commodities for Chinese import.

He explained that the currency swap arrangement between Nigeria and China coupled with the expected inclusion of Chinese yuan in Nigeria’s reserves will somewhat reduce the increased demand for dollars for trade settlement.

“Don’t forget that the trade between Nigeria and China is about 23 to 25 per cent in terms of import. What this means is that about 25 per cent of our import is from China, which puts significant pressure on our reserves in terms of payments for Chinese imports,” he stated.

According to him, “the arrangement will ensure that Nigerian importers do not continue to demand for dollar to import from China through cross exchange rate means. Rather, the yuan/ naira currency swap arrangement will ease the settlement of trade between the two countries.

“One advantage of this is that it will help ease pressure on our reserves. The sharp demand for dollar for importation will reduce, as importers can then buy from China without dollar backing due to the swap arrangement.”

Meanwhile, Executive Director, Corporate Finance, BGL Capital Ltd, Femi Ademola, said that it was a good deal so long as it is properly implemented, while citing Ethiopia as a very good case study on what the deal with the Chinese can achieve.

“We consider what China has been able to achieve across Africa in terms of aiding African countries to develop infrastructure. It would appear that this deal with the Federal Government of Nigeria is a very good idea. In fact, the question should be why did it take Nigeria this long before consummating such a deal,” he inquired.

He allayed fears of negative consequences since the deal is tied to service provision (infrastructure development) which prevents any possibility of misapplication/misappropriation of the fund. He hinted that the idea of keeping a larger portion of the country’s foreign reserves in Chinese currency was theoretically sound.

According to Ademola, since a significant portion of Nigeria’s imports are from China, it would be most appropriate for Nigerians to conduct these trades in Reminbi rather than the dollar as this will reduce the demand pressure on Nigeria.