Currency Swap and how it Contributes to Nigeria's Economic Growth and Development.

by: Ejiro U. Osiobe and Odezi M. Oseghe

Currency Swap and how it Contributes to Nigeria’s Economic Growth and Development.

Ejiro U. Osiobe[1]

Ane Osiobe International Foundation

Plot 114 Lugbe, Federal Capital Territory NG, 900001, Nigeria

Odezi M. Oseghe[2]

Ane Osiobe International Foundation

Delta State Liaison Branch, Delta State, Nigeria


This study explores the Bilateral Currency Swap Agreement (BLCSA) between Nigeria and China. The initiating institutions for the BLCSA are the Central Bank of Nigeria (CBN) and the Peoples’ Bank of China (PBC). The main objective of this paper is to ascertain the contributions of the currency swap to the economic growth of Nigeria. This article gives insight on reasons that necessitated the signing of the agreement, reviewed literature, and identifies benefits and concerns inherent in the BLCSA. Haven identified some concerns and assessed the performance of the BLCSA; this article highlights some recommendations that would be of interest to all the stakeholders of the BLCSA.

Keywords: Currency Swap, Nigeria, China, BLCSA.


Dr. S.A. Osiobe funded this work and the contribution of Ane Osiobe International Foundation in this project, as specified under the ethics statement of Ane Osiobe International Foundation, Ane Osiobe Trendsetters series provides the public with transparent, unbiased information to help foster growth and development in Africa.

Currency Reserves and its importance to an economy:

Resources needed within an economy are not entirely under the reigns of an independent nation; this statement is not wholly accurate in every situation. If the latter is true, then the opportunity cost to function in a closed economy would be overbearing for any nation. To tackle this dilemma, trading with other countries is the best solution to hedge on disadvantages and expand on areas where the economy has absolute and comparative advantages. The US dollar is the hard currency[3] used for international trade, by most countries’. However, two sovereign nations engaged in commerce, can create a BLCSA and diversify their foreign reserve currency[4].

In Nigeria, the US dollars has been the primary foreign reserve currency by the CBN since 1967 (CBN, 2017). But in 2011, the CBN decided to add the Chinese Yuan Renminbi (CNY) to its reserves. The decision was driven by the large volume of trade between Nigeria and China; after all, the majority of Nigeria’s imports in 2017 came from China. (OEC, 2019). The statistics, on trades between the two countries’ in 2016 was about $ 414.7 billion and accounted for 22% of Nigerian import as at the last quarter of 2017 (Adu & Ahmed, 2018).

Since 2008, the Chinese government has signed thirty-five BLCSA agreements with other countries. Nigeria is the third African country and thirty-fifth country globally to sign a BLCSA with China (Olayiwola and Fasoye, 2019). The Council on Foreign Relations (CFR) in 2015 shared that China’s motivation for these swap agreements is to promote trade and investment and to encourage trading with the CNY at the international market. The Nigeria – China BLCSA is proposed for three years, and its terms and agreement(s) is to exchange 15 Billion CNY for N 720 Billion.

 Currency swap:

The CBN describes currency swap as a bilateral agreement between two nations to exchange cash flows in their currencies at a predetermined rate for a specified period. It can also be seen as a swap in a corresponding amount in another currency to smoothen bilateral trade settlements and provide liquidity to financial markets. Swap deals between countries facilitate the sealing of bilateral trade using their national currencies, instead of a third-party’s currency.

There are three types of currency swap: one, the fixed currency swap, also referred to as the plain vanilla. It consists of an exchange between two parties for a fixed rate of interest in one currency in return for a fixed rate of interest in another currency. Two, the fixed-floating currency swap, also called circus swap. It is a fusion of plain vanilla and a market-determined interest rate. It involves the payment of a fixed interest rate on one currency and the receipt of a floating interest rate on another. The third is the floating-floating currency swap which entails that market forces determine the interest rates applied on the two currencies to be swap.

Theoretical and empirical reviews:

According to Van (2014), the effect of China’s currency swap agreements with other countries will have a noteworthy impact on the US dollar. The effect would lead to a reduction in the dependence on the dollar for international trade, thereby threatening the dollar reserve status. The statement is validated by Durden (2014), stating that China’s BLCSA may lessen the power of the US dollar as a reserve currency. These currency swap moves by China could lead to imported inflation on nations that hold their reserves in US dollars.

According to Olayiwola and Fasoye (2019), their paper evaluates the impact of Nigeria-China’s currency swap agreements on the US dollar to the naira exchange rate. The study employed the Robust Least Squares (RLS) technique covering 1999 to 2017. The study results showed the BLCSA would make the naira appreciate against the US dollar. However, doubts assail due to the inadequacy of data and study period adopted for this study since BLCSA was introduced and signed on 27th April 2018.

Adhikari (2016) studied the magnitude to which the China – Indonesia currency swap impacted on the value of the US dollar. The objective was to appraise the effect of the swap agreement on the rupiah to the US dollar. The study used the natural logs of Indonesian and US data; variables include the real Gross Domestic Products (GDP), money supply, and a dummy variable for the swap deal. The analysis showed that China-Indonesia BLCSA does not affect the exchange rate relations between the US dollar and the Indonesian rupiah. The author, suggests that the principal amount in the BLCSA might be inconsequential in comparison to the volume of Indonesia’s annual trade.

Oladosu (2018) examines the effects of the BLCSA between Nigeria and China on the two nations. The paper shows that the deal will smoothen the bilateral trade relationship between the nations’, which will encourage foreign direct investment in Nigeria. Furthermore, the article appeals to government agencies to monitor trade transactions, prevent the unrestrained inflow of goods, and manage the foreign reserves of the country more effectively.       

Implementing the BLCSA:

China is one of Nigeria's largest trading partners. The trade value between China and Nigeria in 2017 alone was estimated at N 2 trillion, which is 8.7% of the total merchandise trade. This makes China, Nigeria’s third major trading partner after India with 12.5%, and the US 10.8% (National Bureau of Statistics (NBS) in Gbadeyanka, 2018). With the US dollars being one of the hard reserve currencies of the world, it is used for international trade. The inferred idea implies that if Nigeria wants to import from China, Nigeria would have to convert naira to US dollars, which would later be converted to Renminbi to pay China. Taking into consideration the growth of trade volume and value between Nigeria and China, the use of the US dollar for closing their trade deals is an uncalled-for hassle and time waste. The BLCSA between the CBN and PBC for N 720 billion for 15 billion CNY would streamline the trade process. That is, it would make access to liquidity easier for people in business and companies from both countries who are engaged in business dealings. Thus, the huddles of obtaining dollars for trades between Nigeria-China is eliminated.

Advantages and concerns of the Nigeria – China BLCSA:

One of the main benefits is access to naira and renminbi by people in business from both countries without the need for converting to US dollars. Therefore transactions deal/dealings can be closed in either the naira or the renminbi. Another advantage of the deal is completing business deals becomes more comfortable between businesses of both countries. This is because the troubles of obtaining US dollars have been eliminated. Another benefit of the BLCSA is, the adverse effects of the dollar to the naira exchange rate would be hedged. In Nigeria’s last recession, there was high volatility of the dollar to the naira exchange relations, and as a result, the high demand for the US dollar by Nigerian businesses led to a scarcity of the US dollars. The shortages, in turn, led to the losses of the naira against the dollars and in turn inflation. The BLCSA should contribute towards protecting the naira from its vulnerability to the US dollar.

Better foreign reserves management is another advantage of the 2018 BLCSA. The social amenities in Nigeria are in a poor state (Anaeto, 2018); this negatively affects the industrial and non-industrial sector(s) of the Nigerian economy. The lethargic state of the industrial and non-industrial sector(s) makes the Nigerian economy more import-dependent. The import-dependent nature of the economy brings to play the high demand for US dollars to finalize international transactions. Unfortunately, this has led to the depletion of foreign currency earnings and reserve of the Nigerian economy. Thus, implementing the BLCSA will decrease demand for the US dollar for international trade, leading to an increase in the foreign reserve and improve financial stability.

Furthermore, the BLCSA might promote business, and FDI flows between China and Nigeria. Currently, Chinese projects are found all over the sub-sectors of the Nigerian economy, and according to Ide-Jetro (n.d), since 2002, China’s projects and commitments in Nigeria have amounted to about $ 5.4 billion. Tubel (2018), comments that China is Africa’s most significant financial ally undertaking several projects on the continent. The more accessible the Naira is to Chinese companies, the more likely there will be an increase in the rate of FDI to the Nigerian economy, both in the long and in the short run.

Another value of the BLCSA is the possibility of providing an alternative foreign reserve currency than the US dollar. The BLCSA would result in, China and Nigeria no longer needing the US dollar while sealing a business deal involving both countries. This is also a positive by-product between Nigeria and other countries who have signed a BLCSA with China.

According to Ogwo and Okpara (2015), Nigerians favor foreign goods over domestic goods, and this taste could make the BLCSA deal unfavorable to the Nigerian economy, making the nation a dumping destination for Chinese products. Furthermore, the low-cost and quality of Chinese products compared to Nigerian products might lead to a steep competition for local companies and with the struggling middle class, this could eventually lead to the collapse of the Nigerian industrial sector growth. Lastly, another cause for concern is Nigeria’s rising unfavorable balance of trade with China. There is fear that this skewed relation could further deteriorate Nigeria’s trade position with China.

Implication(s), step(s), and conclusion:

Since the inception of the BLCSA, there have been different views on the performance of the agreement so far. Billy Gillis-Harry, the President of the Coalition of South-South Chamber of Commerce, Industry, Mines, and Agriculture, said it is difficult to access CNY to finalize trade transactions with China and the dollar is still being involved in the process (Nwaoguji, 2019). Contrary to Billy’s statement, Ojosipe Ayodele, Head of Enterprise Banking and Trade Finance at Stanbic IBTC; said that the BLCSA has brought about more accessibility of the CNY to Nigerian businesses. Further stating that the BLCSA has brought about better terms of trade for Africans and Chinese people in business working on linking the nations (CNBC Africa, 2019). At this point, it is impossible to examine whether the BLCSA has had a positive impact on the naira US dollar exchange rate, but the two ideology are of importance in understanding the situation.

From the Nigerian perspective, the BLCSA is an effort by the CBN to achieve foreign exchange stability for the naira. The BLCSA could become a vital tool towards realizing this. At the same time, it might be opening up the economy to the risk of over-dependence on foreign products which the industrial sector could have produced domestically. A deliberate effort at revamping the infrastructures and industrial sector of the Nigerian economy to produce goods of global standards could be an effective strategy to enduring stability of the naira.

Furthermore, since the bulk of Nigeria’s imports are from China, the Nigerian government could consider initiating partnerships with Chinese businesses in which both parties will benefit. Emanating from such connections will be easy access to the Nigerian market and job creations that would lead to technological and economic growth. As stated earlier, the BLCSA intends to make the trade deals between Nigeria and China easier and to foster growth and development of each nations local economies. The benefits of the BLCSA are impressive, but caution should be applied so as not to be hit by the adverse effects, especially that of hampering the performance of the industrial and non-industrial sector of the Nigerian economy. In conclusion, all hands should be on deck to ensure that despite Nigeria’s imports, the industrial and non-industrial sectors are being developed simultaneously until the sectors operate at their optimum. 


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[1] Founder/CFO of Ane Osiobe International Foundation

[2] Research Associate at Ane Osiobe International Foundation

[3] A safe currency globally traded that serves as a reliable and stable storage of value.

[4] Also known as an anchor currency, is a currency held in significant quantities by sovereign governments as part of their foreign exchange reserves. The anchor currency is mostly used in international transactions, international investments, and all aspects of the global economy.