Foreign savings have historically been considered important for increasing a country’s capital production ratio in development economics studies. These studies have taken into account elements including Foreign Direct Investment (FDI), official development assistance (ODA), foreign commerce, the transfer of technology, and, more recently, remittances.
Remittances typically refer to the portion of migrants’ earnings that are remitted back to their country of origin, their family, and communities, either in cash or in kind. According to the International Monetary Fund (IMF), remittances are household income from foreign economies arising mainly from the temporary or permanent movement of people to those economies. Remittances include cash and non-cash items that flow through formal channels such as electronic wire, or informal channels, such as money or goods carried across borders. International migrant remittances have steadily grown to become an important source of external finance in Nigeria and other developing Nations.
Over the past twenty years, remittance flows have multiplied five-fold, acting as a countercyclical force during global economic downturns in recipient nations. This makes it important to continue to analyse the potential of migrants’ remittances to contribute to development. Today, they represent the largest source of external finance for many developing countries, ahead of Official Development Assistance (ODA) and Foreign Direct Investment (FDI).
While private capital mainly flows to emerging countries, remittances are particularly important in poorer countries where they represent over a third of the Gross Domestic Product (GDP). They also form an important contributor to resilience in the face of economic or humanitarian crises.
Remittances have proven to be more dependable and consistent than other forms of external financing like foreign direct investment, public debt, or official development assistance, according to a UNCTAD (2011) report. Remittances to low- and middle-income countries (LMICs) withstood global headwinds in 2022, growing an estimated 5% to $626 billion (World Bank, 2022). According to the latest World Migration and Development Brief, remittances to Sub-Saharan Africa, the region most affected by the global crisis, were expected to increase by 3.9 percent to $53 billion in 2022, up from 16.4 percent in the previous year (due mainly to strong flows to Nigeria and Kenya).
Though Nigeria’s economy largely depends on earnings from the export of minerals (crude oil and gas) for her foreign reserve stock, other notable sources of inflow include autonomous sources such as foreign loans and advances, foreign capital importation (foreign direct investment & foreign portfolio investment), capital gains, and diaspora remittances. However, Diaspora remittances were among the nation’s top sources of non-oil foreign exchange. The Central Bank of Nigeria (CBN) in recent years has been making concerted efforts to boost its reserves by using a combination of demand and supply side measures to strengthen the foreign exchange market due to unpredictable movement in prices of crude oil, which has for many years been the main source foreign exchange for the country and any shock to that singular source of forest often cause a disproportional effect on foreign reserves as well as the exchange rate of the Naira to the US Dollar.
Consequently, in recognition of the strategic significance of the Nigerian diaspora, the Nigerians in Diaspora Commission Establishment Bill was passed into law by the Federal Government in July 2017. The Law created the Nigerians in Diaspora Commission (NiDCOM), which was formed to engage and utilise the human, capital, and material resources of this demography in the socioeconomic, cultural, and political growth of Nigeria (PwC, 2019).
According to data from the CBN, diaspora remittances first outpaced oil revenue in 2015 as $21.2 billion was sent home officially by Nigerians living abroad, surpassing the $19.6bn oil export proceeds for those 12 months. Nigerians abroad sent home $19.7 billion in 2015 and $22 billion in 2016, respectively, more than the $10.4 billion and $13.4 billion earned from oil exports during the same period. The CBN’s annual economic reports show that in 2018 the total revenue from oil was $18 billion while Nigerians abroad sent home $25.1bn, the highest in four years.
The administration of President Bola Ahmed Tinubu, in its Agenda Roadmap, indicated that the government is open to exploring innovative measures targeted at harnessing and optimising the potentials of Nigeria’s in the diaspora as part of its initiate for stabilising the foreign exchange market and growing the economy sustainably. It is expected that diaspora remittances can double within a period of five years from the current annual average of $20 billion. We believe that this laudable objective is a low hanging fruit and largely achievable through the implementation and combination of the following suggestions.
Reintroduction of the Naira Rebate Scheme and Making it more Attractive: The World Bank noted that the introduction of the Naira Rebate Scheme and e-Naira encouraged migrants and made remittance service providers have easy access to bank accounts. It noted that diasporans are naturally empathetic to sending more money to their home countries during rising inflationary trends to cater to their relatives. This ordinarily is expected to lead to an increase in remittance flows into the country during this period of high inflation. A look at remittances inflows after the announcement of the Nara-4-dollar scheme shows that remittances through the banking system jumped from $4.94 billion in the second quarter of 2021 to $5.16 billion, at the end of the first quarter of 2022. Thus, the reintroduction of the suspended Naira Rebate Scheme with necessary adjustments in the policy framework can be considered by the CBN. The average transaction cost for sending $200.00 to Nigeria currently stands at 7.80 percent (amounting to N15.6).
Lesson from Bangladesh is that incentives for remittances are pegged at levels not less than 50.00 percent of the transaction costs at any point in time. While the average cost of remittances to Bangladesh is currently at 4.30 percent, the government in 2021 increased the bonus for money sent to Bangladesh by Bangladeshis abroad from 2.00 percent to 2.50 percent. To maximise the inflow of remittances under the Naira Rebate Scheme, increasing the bonus rate from ₦5.00 per dollar to a higher figure should be considered by CBN.
Implement Diaspora Support and Engagement Initiatives: Nigerians in Diaspora Commission (NiDCOM) can achieve a sustainable flow of remittances into the country and ensure that its diaspora is engaged in an ongoing basis by creating an effective digital platform that caters for germane needs of the diasporas on real time. The platform should be able to elicit the interest of Nigerians abroad and trigger them to participate more in their home country. Nigerians abroad are seeking for platforms that ensure their participation in electoral process (1.e, voting in local elections), registration management [i.e, National Identification Number (NIN) enrolment and issuance, facilitation of pension claims, etc.], and Facilitation of International Passport services. This platform will help boost morale of Nigerians in the diaspora to participate more in the affairs of their home country, including channelling their funds to viable investment programmes.
Expand Motives for Sending Remittances into the Country: According to WorldRemit, the immigrants from West Africa in the United States and United Kingdom listed daily expenses, gifts, medical expenses, and education of relatives in their home country as top reasons they sent money home in 2021. Only about 3 percent of remittances inflow into Nigeria are directed towards investment while the rest are spent on relatives, family celebrations, and real estate acquisition. The major barriers to investing by the diasporans are the lack of credible real-time investment information, the absence of enabling investment products and platforms, and the minimum threshold of funds set by investment firms.
Reduce Cost of Processing Remittances: The global average cost of sending $200.00 was 6.00 percent in 2022. It is cheapest to send money to South Asia (4.30 percent) and most expensive to send to Nigeria/Sub-Saharan Africa (7.80 percent). Moderating transaction charges by IMTOs towards the level obtainable in South Asia can be explored by the CBN. It is believed that reducing transaction charges will not only boost the volume and value of remittances inflow into the country but ultimately improve liquidity in the foreign exchange market.
Dr. Vincent Nwani is an economist and investment specialist.
