Nigeria and China have renewed their bilateral currency swap agreement (BCSA) that was originally agreed in April 2018 and which enables the exchange of 15 billion yuan (US$2 billion).

The agreement allows both countries the direct exchange of their respective currencies - the Nigerian naira and the Chinese yuan - to facilitate bilateral trade and financial transactions without the need for intermediate currencies, like the US Dollar.

L/C availability

Under the agreement, an amount of yuan is made available to the Central Bank of Nigeria (CBN), which will then make the yuan available to Nigerian banks, who can on that basis open renminbi-denominated letters of credit (L/C) for Nigerians wishing to do business with Chinese counterparties.

The BCSA was established between the Central Bank of Nigeria (CBN) and the People's Bank of China and this latest renewal extends the agreement for an additional three years, with provisions for further renewals upon mutual consent.

Trade facilitation and economic cooperation

By enabling direct currency exchange, the BCSA simplifies transactions for businesses in both countries, reducing transaction costs and exchange rate risks associated with third-party currencies like the US dollar.

The renewal signifies strengthened economic ties between Nigeria and China, promoting increased trade and investment opportunities. It reflects both nations' commitment to deepening their financial and economic collaboration.

Utilisation and impact

Since the agreement's inception, the CBN has utilised a portion of the swap funds to support trade transactions.

As of August 2023, out of the 15 billion yuan available, 9 billion yuan had been drawn, with 6 billion yuan utilised and 5.1 billion yuan repaid. This indicates active use of the facility to facilitate trade between the two countries.

Exchange rate stability

While the BCSA aims to reduce pressure on Nigeria's foreign exchange reserves and stabilise the naira by decreasing demand for the US dollar, its effectiveness in achieving these goals has been subject to analysis.

Some reports suggest that the agreement has not significantly curbed exchange rate pressures as initially envisaged.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.