Nigerian importers, exporters Dollar-transactions negating currency swap gains — CBN

 

The Governor of the Central Bank of Nigeria, Olayemi Cardoso, during a recent meeting with maritime journalists highlighted the gains of the Nigeria-China Currency Swap Deal. Represented by his Special Adviser; Mr. Anthony Ogufere, the CBN Governor reeled out challenges that have inhibited the deal. TOLA ADENUBI brings the excerpts:

CAN you explain the importance of today’s conversation?

I am honoured to speak on a subject of considerable strategic significance to Nigeria’s trade and economic development  The Nigeria-China Currency Swap Deal and its implications for the Nigerian economy and, more specifically, the maritime industry. In today’s rapidly evolving global financial environment,developing economies are increasingly compelled to adopt innovative policy instruments that will strengthen exchange rate management, deepen trade and investment relations, and boost macroeconomic resilience. This emerging instrument includes the Bilateral Currency Swap Agreement (BCSA), which several countries have embraced.

A bilateral currency swap is an agreement between two central banks to obtain foreign currency liquidity from each other as they exchange a specific amount of their currencies at a predetermined exchange rate for a pre-agreed period. The aim is to relieve external funding pressures and exchange rate volatility.

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How did Nigeria’s journey with this agreement begin?

Over the past two decades, China has entered bilateral currency swaps with several countries, including Nigeria, in an effort to increase the share of the Renminbi (RMB) in global trade and financial transactions. The People’s Bank of China (PBOC) has signed these agreements with central banks on behalf of the country. Through these swap lines, countries are able to settle transactions in RMB directly without the need for a third-party currency (usually the United States dollars). This engagement provides a timely and important platform for examining the objectives, opportunities, and challenges of China Currency swaps, particularly how the swap deal can help to reposition Nigeria’s maritime industry “a vital channel for external trade. Nigeria’s journey on BCSA with China began with a series of forward-looking policy decisions, including the strategic move by the Central Bank of Nigeria (CBN) to convert a portion of Nigeria’s external reserves to RMB” a clear recognition of China’s growing prominence in the global economic environment and the rising internationalisation of the RMB. In 2011, the CBN diversified its reserves by incorporating the Chinese Yuan Renminbi (CNY). This decision was influenced by the growing trade relationship between Nigeria and China, as imports from China to Nigeria peaked in 2017.

 

Can you shed light on the structure of the deal itself?

In May 2018, the CBN and the Peoples Bank of China (PBOC) formalised a currency swap agreement valued at RMB 16 billion (approximately US$2.5 billion). By the end of 2024, China became Nigeria’s largest trading partner, accounting for approximately 35 per cent of Nigeria’s total imports while bilateral trade volumes between the two countries had reached a remarkable US$11.58 billion, according to the National Bureau of Statistics. In response to the rising trade volume between the two countries, the central banks of both countries engaged in a series of negotiations to establish a bilateral currency swap framework.

 

Has the deal been extended since its inception?

Yes. Following the successful negotiations, both parties signed a three-year bilateral currency swap agreement valued at 15 billion Chinese Yuan (approximately 720 billion or US$2.5 billion) In 2018. The agreement positioned Nigeria as the third African nation, after South Africa and Egypt, to secure a currency swap deal with China. South Africa had earlier in 2015 secured a three year 30 billion yuan (US$4.8 billion) currency swap with China while Egypt had in 2016 secured a three-year, 18 billion yuan ($2.62 billion) BCSA to facilitate trade and improve Egypt’s foreign currency liquidity.

The BCSA framework enables banks operating in Nigeria to issue RMB Letters of Credit on behalf of importers, helping facilitate seamless international trade transactions with Chinese businesses. On the other hand, naira liquidity is provided to Chinese firms and investors doing business in Nigeria. The Agreement is designed to eliminate the need for a third-party currency, usually the US dollar. for transactions involving the two countries, thereby reducing the pressure on countries’ dollar reserves, transaction costs, foreign exchange risks, and the turnaround time for trade settlements. Also, the currency swap deal provides a platform to strengthen regulatory and financial intelligence cooperation for closer regulatory collaboration in areas such as anti-money laundering, transparency, and illicit financial flow mitigation. Following the conclusion of the initial three-year agreement, there was a call for the renewal of the bilateral agreement by both countries. As such, the agreement was renewed for another three years in April 2021. In December 2024, both parties mutually agreed to extend the deal for an additional three-year period. The extension of the agreement is a testament to the enduring commitment of both countries to improving bilateral financial cooperation.

 

What are the economic benefits of this currency swap agreement?

It can lead to a substantial reduction in transaction costs for Nigerian businesses engaged in trade with China. Before the implementation of the swap agreement. Nigerian traders faced the cumbersome and costly process of multi-layered currency conversion procedures, which exposed businesses to higher transaction costs, exchange rate risks, and forex-related delays. The currency swap agreement streamlines this currency conversion process by enabling settlements of trade in naira and renminbi directly. The Agreement can therefore contribute to Nigeria’s foreign exchange reserves accretion. The agreement provides an alternative settlement channel with direct access to renminbi liquidity, thus, freeing more US dollar foreign exchange for other critical transactions. In addition, the Agreement positions Nigeria as a credible trade partner in the eyes of China and the global investment community. By facilitating seamless bilateral transactions and reducing currency conversion inefficiencies, the BCSA can strengthen investors’ confidence, potentially stimulating higher inflows of Foreign Direct Investment (FDI). This improved financial and trade integration with China can also unlock greater access to infrastructure development financing, positioning Nigeria as a more attractive destination for long-term capital investments.

 

Specifically, how does this impact Nigeria’s maritime sector?

The significance of the Nigeria China currency swap agreement extends beyond macroeconomic benefits; it could have profound implications for Nigeria’s maritime industry, which is the primary conduit for the movement of goods between the two countries. In alignment with this, the Ministry of Marine and Blue Economy is actively working to rehabilitate and modernise existing port infrastructure, strengthen the legislative and policy framework governing the sector, and automate all port processes to ensure import and export processing efficiency. These efforts are expected to complement the currency swap agreement by further streamlining trade processes and reducing transaction costs in the maritime sector.  The ease of transaction settlements in local currencies “facilitated by the swap deal” could provide substantial relief to stakeholders in the shipping and logistics sectors. With Nigerian importers and exporters being able to conduct trade in naira and renminbi, it would enable greater financial predictability and stability, which is critical to the efficient operation of maritime businesses.

Moreover, by eliminating the need for third-party currency conversions, the swap agreement will significantly lower transaction costs in the trade value chain, including shipping costs. Reduced costs would translate to greater efficiency and improved trade competitiveness.

 

Are there maritime-specific advantages in terms of financing?

Yes. A less obvious but important opportunity lies in vessel financing and maritime asset acquisition. The currency swap can open avenues for Nigerian maritime businesses (such as shipping companies, fishing fleets, or offshore service providers) to finance or purchase vessels and equipment from China on favourable terms given that China is a leading shipbuilder and has export finance programs for vessel sales. The swap agreement could also encourage Chinese investment and partnerships in Nigerian port infrastructure. China’s port developers and financiers are very active across Africa, and Nigeria is a prime focus. A case in point is the Lekki Deep Sea Port in Lagos “a Belt and Road Initiative project built and majority-owned by Chinese firms. China Harbour Engineering Company not only constructed Lekki Port, but also took a 54 per cent stake in the port and helped finance it via the China Development Bank. The success of Lekki Port underscores how attractive Nigeria’s maritime sector is to Chinese investors. The simplified settlement process would also result in streamlined port activities, faster customs clearance, with improved availability of trade finance instruments and documentation.

 

Are there any challenges or risks associated with this agreement?

Yes. Despite the significant trade and economic benefits, the bilateral currency swap agreement provides, it is not without inherent risks and challenges. A primary concern is Nigeria’s persistent trade imbalance with China. Although the swap arrangement has facilitated smoother import flows from China, there has been a disproportionately low export flow to China. In 2023, for instance, Nigeria exported approximately US$2.51 billion worth of goods to China, compared to imports from China of around US$20.00 billion. The composition of Nigeria’s exports – largely raw commodities such as crude oil, natural gas, and solid minerals limits the inflow of Chinese Yuan and creates an unbalanced trade relationship. The imbalance in trade flows constrains Nigeria’s capacity to reap the full benefits of the swap agreement.

Another critical challenge is the limited awareness and adoption of Chinese yuan-denominated transactions among Nigerian businesses. Many importers and exporters continue to transact predominantly in US dollars due to entrenched market practices, limited financial literacy, and a lack of proactive sensitisation by financial institutions. Furthermore, this slow uptake of Chinese yuan-denominated trade financing by some Nigerian banks has further inhibited the success of the agreement.