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Nigeria is on the verge of adopting the Chinese Yuan as reserve currency to stop Naira's depreciation

The Nigerian government is looking to preserve the value of its currency via the adoption of the Chinese Yuan. According to Nigerian socialist newspaper The Punch, the decision was the result of a proposal made in a plenary session by Jafaru Leko, a member representing the Bogoro/Dass/Tafawa Balewa Federal Constituency, Bauchi State.

The Naira has indeed been struggling against major currencies like the US dollar in recent years, facing various pressures like oil price fluctuations, inflation, and capital flow dynamics. Nigeria heavily relies on oil exports for dollar revenue. However, recent oil price fluctuations and production challenges have limited dollar inflows, reducing supply in the foreign exchange market. Nigeria imports a significant amount of goods and services. As international prices rise and the need for imports continues, the demand for dollars to pay for these imports increases, putting pressure on the Naira.

In June 2023, the Central Bank of Nigeria (CBN) unified the multiple exchange rates into a single, market-determined rate. While this move was intended to increase transparency and efficiency, it initially led to a sharp depreciation of the Naira due to pent-up demand for dollars. Furthermore, the CBN's relatively low interest rates compared to other countries make dollar assets more attractive, prompting capital flight and further weakening the Naira.

On the other hand, the Chinese Yuan has been gaining international recognition and steadily increasing its presence in global reserves. China's economic might and growing trade influence across Africa, including Nigeria, contribute to this rise.

The Nigerian government believes that holding Yuan in reserves could diversify Nigeria's foreign exchange portfolio, potentially reducing dependence on the weakening US dollar and its vulnerabilities. Moreover, increased use of the Yuan could simplify and reduce transaction costs for trade between Nigeria and China, further strengthening their economic ties. The Nigerian government believes that the Yuan's relatively stable exchange rate compared to the volatile Naira could offer some protection against depreciation pressure.

This move, however, presents a set of challenges. The first major challenge is the limited convertibility. The Yuan's convertibility on international markets remains restricted, posing potential challenges for Nigerian businesses when dealing with other currencies. Businesses may face difficulties exchanging Yuan for other currencies, especially in smaller markets or during times of economic uncertainty. This could increase transaction costs and reduce the overall efficiency of financial transactions.

The second major challenge is the increased dependence on China. Holding a significant portion of reserves in Yuan could raise concerns about Nigeria's economic and political dependence on China. This could limit Nigeria's flexibility in international relations and trade negotiations. Increased reliance on the Yuan could expose Nigeria's financial system to potential fluctuations and policy changes within the Chinese economy, making it more vulnerable to external shocks.

The third major challenge is geopolitical considerations. Using the Yuan as a reserve currency could be seen as a political move aligning Nigeria with China's global ambitions. This could raise concerns among Western allies and potentially complicate Nigeria's relationships with other countries. And the geopolitical rivalry between the US and China could further complicate matters, potentially impacting Nigeria's access to international markets and resources.

While discussions about adopting the Yuan as a reserve currency are ongoing within Nigeria, no official decision has been made. The Central Bank of Nigeria (CBN) claims to remain cautious and emphasizes diversification rather than relying solely on the Yuan. The potential for Nigeria adopting the Yuan as a reserve currency carries both potential benefits and risks, requiring careful consideration and informed decision-making.


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