how to compute external debt service payment reduction benefits from currency swap deal

1. CURRENCY SWAPPING AND EXTERNAL BALANCE: THE NIGERIAN CASE
Introduction
A currency swap is a contract to exchange at an agreed future date principal amounts in two
different currencies at a conversion rate agreed at the outset. It is an agreement to exchange fixed
or floating rate payments in one currency for fixed or floating payments in a second currency plus
an exchange of the principal currency amounts. It allows a customer to re-denominate foreign
obligations from one currency to another. In the case of the swap deal Nigeria entered into with
China to reduce the weight of dollar on the naira and also to weaken the monopoly of dollar as the
foremost intervention currency in the international capital market, Nigeria should feel the impact
in terms of reduction in the amount of naira that must be converted to dollar to service external
debts.
Nigeria made a swap deal to exchange $2.5 billion for Renminbi (RMB) 16 billion with China.
The will enable Chinese producers get enough Naira from banks in China to pay for their imports
from Nigeria (Obalum and Onuoha, 2019). This deal was signed based on the exchange rate of
RMB1 to N47. The foreign exchange market is a strong determinant of the magnitude and direction
of a country’s external debt service capacity. High debt profile holds serious macroeconomic
implication and could hinder the possibility of obtaining external funding assistance during the
period of severe fiscal constraint pressure. Hence the need to examine the debt service payment
reduction benefits from currency swap deals as is the case with Nigeria.
Trends in Dollar to Naira Exchange Rate
The above chart reveals the price of a dollar in terms of naira had been unstable since 1986
which is the period the Structural Adjustment Programme was conceived and implemented. The
basic feature of the period was the devaluation of the naira to enhance exports and solve the
imbalance in the Nigerian balance of payments. The graph very much suggests that devaluation
0
2E+11
4E+11
6E+11
8E+11
1E+12
1.2E+12
1.4E+12
1.6E+12
1.8E+12
2E+12
dollar to naira

2. in a trading economy like Nigeria (as opposed to a producing one) only strengthens the dollar to
have more command on more naira than before.
Trends in External Debt Service Payments
The chart above clearly shows that the debt profile of Nigeria has been on the rise since 2015.
This can be linked to the rise in dollar liabilities resulting from persistent devaluation of the
naira.
External Debt Service Reduction Benefits using Currency Swapping in Place of
Devaluation
The graph above shows that external debt service through the intervention of the Chinese RMB
would drastically have reduced the amount of naira needed to service by an average of N924.9
billion from 2015 to 2018. This was arrived at by firstly expressing a naira in terms of RMB and
0
2E+11
4E+11
6E+11
8E+11
1E+12
1.2E+12
1.4E+12
1.6E+12
1.8E+12
2E+12
naira
-1.4E+13
-1.2E+13
-1E+13
-8E+12
-6E+12
-4E+12
-2E+12
0
2E+12
4E+12
Reduction in debt servicein naira

3. further express in terms of dollar. Secondly, the observations for external debt service payment
in dollars was divided by the result from the first computation made to arrive at RMBs that
would have been needed to service Nigeria’s external debt in place of naira devaluation. Thirdly
the RMBs to service the external debt was divided by the agreed rate of Naira to RMB (1/47) to
arrive at the naira that would have sufficed for external debt service if currency swap had been in
executed since 1986 which is the SAP era. From the graph it is clear that the difference between
the external debts denominated in naira if it was currency swap deal and the original observation
resulting from persistent devaluation showed a positive trend from 1986 to 2018. This reveals
that currency swap would have been a better option than devaluation of the naira against the
dollar which increased the weight of one dollar on the Nigerian naira.