The currency swap deal consists of an agreement between two central banks, at least one of which must be an international currency issuer, to swap their currencies.
The central banks party to the swap transaction can lend the proceeds of the swap, against collaterals they deem adequate, to the commercial banks within their jurisdiction, to provide them with temporary liquidity in a foreign currency.
During his official trip to the world’s second biggest economy, President Muhammadu Buhari struck a Naira and Yuan swap deal, scripted to ease trade transactions between both countries and devoid of current exchange challenges with the United States Dollar.
Diverse stakeholders in the economy project that the Federal Government’s recent currency swap deal with China holds both bright prospects and grave implications for Nigeria even as the naira inched up against the dollar at the parallel market during the weekend.
The deal, according to Presidency sources, has the potential of shoring up the value of the nation’s currency in the foreign exchange market, through a concomitant emergent bidding scheme, with strategic reduced demand for dollar and other major currencies, other than the Yuan.
On the other hand, it has been pointed out that the swap deal was not consummated between the two countries’ apex banks but between Central Bank of Nigeria (CBN) and the Industrial and Commerce Bank of China (ICBC)- the world’s largest lender by total assets and market capitalisation- in lieu of the Central Bank of the Republic of China .
According to the People’s Bank of China (PBoC), those swap agreements were intended not only to “stabilise the international financial market,” but also to “facilitate bilateral trade and investment.”
So, with fingers crossed, we can only hope the swap deal benefits all parties concerned as Nigeria is not the first country to enter into such an agreement with China.