On the international front, the BRICS bloc made up of Brazil, Russia, India, China and South Africa alongside six other countries including Iran, Saudi Arabia, the UAE, Egypt, Argentina and Ethiopia are pushing the agenda to de-dollarizing their respective economies.
A number of these countries are witnessing a shortage of dollars and the consistent hike of the Fed Fund rates is causing a devaluation of their currencies against the greenback.
In line with this new plan, the United Arab Emirates (UAE) has commenced settling oil trades with India’s top
refiners in Rupees while Argentina has announced that it would start to pay for imports from China in Yuan instead of dollars.
The BRICS have commenced slowly selling down their U.S Treasury Bonds and they have collectively sold off US$18.9bn in the last month in order to defend their currency against the U.S Dollars.
On the domestic front, the former CBN governor Mallam Sanusi Lamido at various times lamented the increasing use of the dollar for domestic transactions. Many big schools and hotels prefer to be paid in dollars rather than the naira and it is not unusual to see some wealthy Nigerians spray dollars at parties.
The country has made efforts previously to reduce its dependence on the U.S dollar with a bilateral currency swap between Nigeria and China valued at ¥16bn (circa US$2.5bn) which commenced in 2018 with a 2021 expiration plan but has been renewed for another three years. So far, the apex bank, Central Bank of Nigeria (CBN) has been reported to have auctioned off ¥7.04bn as of June 2022.
The swap deal has not been successful enough to reduce the demand for U.S. dollars even with China being the highest source of the country’s imports amounting to N1.27trn as of H1 2023.
A number of reasons could have accounted for this. Firstly, the size of the swap (N720bn over 3 years) compared with N1.27trn worth of imports from China in H1 2023 alone, is not large to have any appreciatory impact on the naira.
Again, Major Chinese exporters have not been as enthusiastic about the deal as the CBN. The general reasoning here is that major Chinese exporters prefer to receive payments in dollars rather than in Renminbi.
Given that a considerable part of their transactions is dollar-based, these Chinese exporters would rather avoid the cumbersome process of converting the Renminbi to Dollars in China.
The continuous devaluation of the naira against the dollar and the depletion of the country’s foreign reserves means it is more expedient for the CBN to look for more stringent measures to reduce its dependence on the dollar.
The country has witnessed its worst FX liquidity problems in recent years as FX supply continues to shrink amidst growing demand.