Economic diversification and the reduction of the country’s financial risk and dependence on the US dollar are two of the major objectives of the Nigerian economy. This is because one of the most important strategies in this regard is the realization of currency swap agreements with the different international partners. These agreements allow countries to exchange their currencies and thus facilitate trade without the use of a third currency, which reduces exchange rate risk and preserves foreign reserves.
In the recent past, Nigeria has been confronted with challenges that are associated with its dependence on oil exports as its source of foreign exchange. The prices of oil in the international market have been known to go up and down, and this has put the economy under a lot of pressure through inflation and depreciation of the naira. In this regard, forex trading in Nigeria is one of the means to stabilize its currency and enhance the economy’s stability.
A significant development in this regard is the currency swap agreement between Nigeria and China. The agreement was signed in 2018 and was renewed in 2019 and 2020 to allow the exchange of 15 billion yuan or $2.2 billion to support the bilateral trade. This arrangement is especially useful for Nigerian and Chinese companies that want to make their trades in their local currencies, thus cutting the demand for and exchange rate risk of US dollars. The continuation of this agreement shows the growth of the economic relationship between the two countries and the desire to increase financial linkages.
Such currency swap agreements are useful in many ways. First of all, they take some pressure off the foreign reserves since the need for the U.S. dollars in international trade is reduced. This is especially useful for Nigeria, which has often faced exchange rate instability due to dollar shortages. To this end, companies can avoid the costs and uncertainties of currency conversions when engaging in trade, resulting in more set prices and financial forecasts.
Second, currency swaps enhance the bilateral trade relations. These agreements facilitate the payment processes between the countries and, in turn, promote more trade and investment flows. To Nigeria, doing swaps with its huge trading partners, including China, not only has diversified its trade but also has offered a chance to invest in vital areas like infrastructure, technology, and production.
It is also possible that currency swaps may help to stabilize the exchange rate of the domestic currency. This means that as Nigeria reduces its dependence on the US dollar, it can minimize the effects of external shocks on the naira. The stabilization of the domestic currency has positive implications for economic planning and development and, therefore, has positive implications for business and consumers.
However, the effectiveness of currency swap agreements depends on a number of factors. To effectively implement the frameworks, there is the need to have a strong financial structure and regulatory measures that are necessary for the management of section 91 of the BASICA bilateral currency foreign exchange. Furthermore, there must be a good balance in trade between the partnering countries to avoid situations where the swap lines are not fully utilized or lead to imbalances.
Some people may point out that currency swaps are not the solution to all economic problems. Although they provide a way of handling foreign exchange requirements, new economic reforms are needed to deal with fundamental problems such as overreliance on oil, fiscal deficits, and the need to change the economy’s structure. Therefore, currency swaps should be considered as a part of the overall strategy for sustainable economic development.
In conclusion, Nigeria’s pursuit of currency swap agreements is a rational strategy to enhance the country’s economic stability and decrease its susceptibility to external shocks. These agreements make it possible to trade in local currencies, which can contribute to the stabilization of the naira, the conservation of foreign reserves, and the development of international trade relations. Thus, currency swaps are a useful instrument that Nigeria can use to cope with its financial risks and challenges in the course of its economic growth.
