For businesses in both Sierra Leone and Nigeria, it may soon become easy to bypass exchange rates and increase the quantity of goods or services they previously purchased from across both countries. This is a good move as more West African countries continue to peg the exchange rate of their currencies to the U.S. dollar. The Chairman, Economic Community of West African States (ECOWAS) Committee of Governors of Central Banks, Prof. Kelfala Kallon disclosed the currency swap plan between the two countries recently
Here Is All You Need To Know
- According to Kallon, who is presently the Governor, Bank of Sierra Leone the increasing dollarisation of West African economies and subsequent depreciation of national currencies in the region is worrisome.
- Nigerian Investment Promotion Commission (NIPC), quotes Kallon as saying that Sierra Leone decided to go ahead with the swap policy with Nigeria as its leading economic partner.
- However, Kallon noted that the policy is still under planning and consultations between the two are in progress.
- He also noted that the Sierra Leonean financial sector is dominated by Nigerian banks and institutions, and as such the policy will benefit both countries by removing the dollar as a factor in their trade relations.
“We are engaged in deep discussions with my brother, Godwin Emefiele, and we are forming up the plan, and we will take the plan further,” Kallon said.
“Since Nigeria already has a currency swap arrangement with China, Sierra Leone will key into that arrangement. Sierra Leonean import from China can now be done with Naira; this is why we are really interested in the immediate swap deal between Nigeria and Freetown,”
How Does This Help Your Business?
A lot. With the proposed currency agreement, business men in both countries, for instance, may be able to obtain each other’s currency without passing through the official dollar exchange rate. What this means is that your transaction would not be affected by the fluctuating dollar exchange rate.
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In clearer terms, Kallon disclosed how the proposed swap deal will work:
“For instance, a Sierra Leonean trader coming to Conakry would go into the parallel foreign exchange market in Sierra Leone to acquire dollars (at a premium, most times) to bring to Conakry to convert into Guinean francs (mostly at a discount) in order to purchase her wares.
“This transaction then increases the demand for dollars in Sierra Leone, and its supply in Guinea. The result would be a depreciation of the Leone against both the dollar and the Guinean franc, and the appreciation of the Guinean franc against both the Leone and the dollar. When the transaction is reversed (with a Guinean trader going to Freetown to purchase rice, for example), the fortunes of the Leone and Guinean franc would be reversed relative to each other and to the dollar.”
He continued:
“This artificially-induced depreciation of our currencies then creates an expectation of future depreciations, which promotes speculation-induced hoarding of dollars. Like negative shocks, this adversely impacts macroeconomic stability in the region.
“We can mitigate against these outcomes by holding each other’s currencies as reserves to facilitate intra-ECOWAS trade, under such arrangement, the Sierra Leonean trader coming to Conakry would now have access to Guinean francs before leaving Sierra Leone, thus obviating the need for her to buy dollars at a premium in Freetown.”
He said the Guinean counterpart will now have access to Leones before he leaves for Sierra Leone, stressing,
“Consequently, intra-ECOWAS trade would have no significant impact on the exchange rates of both the Leone and the Guinean franc relative to the dollar.”
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organizations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution, and data analytics both in Nigeria and across the world