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PROJECT TOPIC AND MATERIAL ON NIGERIA AND CHINA CURRENCY SWAP: IMPLICATIONS FOR NIGERIAN ECONOMY
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- Name: Nigeria And China Currency Swap: Implications For Nigerian Economy
- Type: PDF and MS Word (DOC)
- Size: [70 KB]
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The importance of Nigerian-china currency swap on our economy development has a national undergoing post economic recession recovery process can ever be over emphasis seeing to the fact that Nigerian manufacturers, cottage industry players and anyone who need imports from China will be able to secure RMB from Nigerian banks: “With the operationalization of this agreement, it will be easier for most Nigerian manufacturers, especially small and medium enterprises (SMEs) and cottage industries in manufacturing and export businesses to import raw materials, spare-parts and simple machinery to undertake their businesses by taking advantage of available RMB liquidity from Nigerian banks without being exposed to the difficulties of seeking other scarce foreign currencies. The deal, which is purely an exchange of currencies, will also make it easier for Chinese manufacturers seeking to buy raw materials from Nigeria to obtain enough Naira from banks in China to pay for their imports from Nigeria.
Currency swap and cross-currency swap account is used interchangely, is an off-balance sheet transaction in which two parties exchange principal and interest in different currencies. The parties involved in currency swaps are majorly financial institutions that either act on their own or as an agent for a non-financial corporation like a nation.
During currency swap, on the trade date, the counter parties exchange notional amounts in the two currencies. For example, one party receives $10 million British pounds (GBP), while the other receives $14 million U.S. dollars (USD). This implies a GBP/USD exchange rate of 1.4. At the end of the agreement, they will swap again using the same exchange rate, closing out the deal. Since swaps can last for a long time, depending on the individual agreement, the exchange rate in the market place (not on the swap) can change dramatically over time.
The Central Bank of Nigeria (CBN) bilateral currency swap agreement with the Peoples Bank of China (PBoC) will help the liquidity issues faced by Nigerian traders and Chinese manufacturers. The Nigerian apex bank said with the deal, Chinese businessman will have sufficient naira to purchase raw materials from Nigeria and Nigerian importers will not endure the challenge of ‘third currency’ fluctuations when trying to make payments for Chinese exports. According to the mother bank of Nigeria, the agreement will allow the two sides to swap a total of RMB15bn for NGN720bn, or vice versa, in the next three years. The deal can be extended by mutual consent. The currency-swap was calculated at the Nigerian central bank’s interbank rate of NGN305:USD1, rather than the Nigerian Foreign Exchange Fixings (NIFEX) rate of NGN338.7:USD1. This implies that we are unlikely to see any unification between Nigerian exchange rates anytime soon.