Why U.S. Dollar Will Fall To Nigerian Naira; China’s Multi-Nation Currency Swaps

It seems my post on the currency swap on Chinese Yuan is generating questions. I had noted that US dollar may fall to the Naira if the pressure on US dollar is disintermediated by direct currency swap on Chinese Yuan. In other words, if Nigerians who import things from China do not have to buy US dollar to pay Chinese merchants in China, the demand for US dollar may marginally drop. If that happens, the exchange rate of US dollar to Naira will drop, assuming common demand and supply mechanics plays out.

Disintermediation does not only apply in the technology world where producers cut-off middlemen or intermediaries to reach consumers directly. What is happening in the Chinese currency swap is the disintermediation of the U.S dollars.

I received emails with people asking if I could quantify this drop at a deeper level. I had projected 5-10% gain for the Naira to US dollar in the black market (other things being equal). There is nothing I will add except to note that cyclical boom and bust of crude oil revenue could make any prediction in Nigeria hopeless.

This is a huge shift and could be a turning point for most businesses in Nigeria. I expect this to help the Naira appreciate 5-10% over U.S. dollars in the next 12 months (other things being equal). Yes, this swap will remove about 30% of forex burden on the U.S. dollar in Nigeria.

China tops Nigerian imports, according to data from the Nation Bureau of Statistics compiled by Invest Advocate.

Major import trading partners and % share to Q4, 2017 Import trade

• China             22.00%

• Belgium                     9.04%

• S.A.             8.96%

• India               6.41%

• Netherlands              5.93%

If you move nearly a quarter of the import from being intermediated by the dollar, it is simple to expect the demand for dollar to drop. My estimate of the appreciation of the Naira to US dollar by 10% is overly pessimistic. If not for the upcoming election which is already making companies to hold-off investments, we could see the Naira gaining up to 15% on the US dollar because of this policy. Of course everything depends on good implementation, and allowing market forces to drive this over backdoor shenanigans.

Expect Chinese Yuan to Drive Intra-Trade

As I make this call, I am also predicting that within the next 36 months, major African countries in order to boost intra-trade will begin to have multi-nation currency swaps tied to Yuan. So, if you buy something from a Ghanaian merchant, you would not have to buy US dollar in Lagos to send to him in Accra. Rather, the Central Bank of Nigeria and its Ghanaian counterpart will help you PAY in Ghanaian Cedi with the underlying currencies swapped in Chinese Yuan. No consumer will see the Yuan but it would power that redesign. For the buyer and seller, the product is being paid on Cedi with Naira. But underneath the trade, it is Yuan that is anchoring everything.   This is where I expect these bilateral swaps Beijing has been signing with individual African nations to morph: multi-nation currency swaps powered by Yuan.

All Together

In my lead policy paper to the African Union on single currency, I hinted on this possibility to improve intra-trade on Africa. The possible welfare losses as a result of the heterogeneous nature of our markets, arising from currency integration could be mitigated through PRIOR regional integrations. The currency swap could do that magic without a supranational central bank being established, allowing nations the freedom to use currency adjustment to manage forex crises whenever they rise.

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