A currency swap deal allows two institutions to exchange payments in one currency for equivalent amounts in the other to facilitate bilateral trade settlements and provide liquidity support to financial markets.
The Central Bank of Nigeria announced the execution of a $2.5 billion bilateral currency swap agreement with the Peoples Bank of China (PBOC) to boost local currency liquidity in the economy. Analysts at FSDH Merchant Bank Limited have stated this will impact positively on the Nigerian economy. The availability of Foreign Exchange funds to Nigeria’s dependent economy remains a critical success factor in national development.
The deal which was signed in Beijing by the CBN Governor, Mr. Godwin Emefiele, and the PBOC Governor, Dr. Yi Gang was worth 16 billion Renminbi (RMB) or N720 billion. This deal will also assist other local businesses by reducing the difficulties they encounter in the search for third currencies especially Nigerians who import goods from China and consequently strengthen the value of the naira.
The swap deal will also improve the speed, convenience and volume of transactions between the two countries reducing certain barriers for Nigerian importers of goods from China and reduce the cost of transactions in multiple currencies. This in turn will lead to stability in the Foreign Exchange market.
The swap will work in the same way as normal transactions involving Letters of Credit to guarantee both parties have the capacity to complete the transaction.
The swap deal is one of the strategies adopted by the Federal Government to overcome the stress and frustrations encountered by businesses in getting financing for contracts and trade deals through local commercial banks.
Under the swap arrangement, contractors or businesses with genuine contract award documents can approach any of the accredited banks to request for credit facilities to execute the contract under terms and conditions to be spelt out in the approved guidelines.
With this currency swap deal between Nigeria and China, the future of Foreign Exchange looks bright!