Nigeria’s remittances have been on a steady slump, down to 75 percent in the first quarter (1Q) of 2021, from 88 percent in the fourth quarter (4Q) 2020, and -71 percent in full-year 2020.
This, according to the World Bank, is due to the dysfunction in the foreign exchange (FX) market, as very large discount in the parallel rate versus the official rate encourages remitters to use undocumented, unofficial channels.
The gap between Nigerian Autonomous Foreign Exchange (NAFEX) and parallel market rates, as of Tuesday was N90/$. The official FX market closed at N410 and the parallel market closed at N500 per dollar.
“I believe that the arbitrage between the two rates will be leading to this kind of disparity,” Jimi Ogbobine, head of consulting at Agusto Consulting, a pan-African credit rating agency, says.
He notes that before the central bank moved the rate to N410, some people bought dollars at N380 or N390 and sold at N480 or N500 in the market, and the N100 difference is a huge incentive to bypass the official market to the parallel market.
“However, the CBN, and earlier in the year when we launched our report, said the biggest game changer today in the Nigerian Diaspora remittance market is the decision of the CBN to allow recipients to pick up their foreign exchange in dollars.
“We expect this to reduce in the second quarter and the rest of the year, because of those rules by the CBN. That game-changing policy initiative by the CBN that allows foreign recipients of foreign remittances to collect their money in hard currency will shape the outcome of the market,” Ogbobine states.
He stresses the need for the CBN to be consistent with this policy, saying it needs to retain and maintain the longevity of this policy rather than looking for quick pin or short-end-game. He is worried that ever since this policy came on, the arbitrage between the naira and the dollar has not reduced.
“What we try to do in this part of the world is immediately we do not see an immediate impact of a policy; we abort that policy and start all over again. The CBN also needs to follow up with other foreign exchange reforms that will lead to the harmonisation of the official and the parallel markets,” he states.
The CBN on November 30, 2020, amended its foreign exchange rule by announcing that beneficiaries of diaspora remittances through the International Monetary Transfer Operators (IMTO) shall have such inflows in foreign currency (dollar) through the designated bank of their choice.
Nigeria’s remittances account for 5 percent of Gross Domestic Product (GDP) as estimated in 2020 by the World Bank.
A Nigerian based investment analyst, who chose to respond anonymously, says for remittances to improve there is need to close the gap between the official and parallel markets.
“The N5 is not sufficient incentive if recipients are collecting it in dollars. They may prefer to collect it from someone who can change it to naira for them at the parallel market rate instead of going to the bank to collect dollars and change.
“I think it is about closing the gap if the CBN wants to achieve significant remittances. If the gap is closed there will not be an incentive for people to be using unofficial markets. There has to be a convergence,” the analyst notes.
The World Bank says in a report that it appears that one-third of Nigerian remitters who hail from the US and Canada and are no longer able to use Bitcoin transfers because of a regulatory crackdown by the central bank in Nigeria, may have modestly shifted to more official channels, explaining the moderation in year-on-year decline seen in 1Q 2021 – while the one-quarter of remitters from neighbouring countries are likely still easily accessing unofficial routes.
Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited, says, “We have already seen the impact on the economy leading to the adjustment of the currency.
The CBN has also taken steps to harmonise the multiple exchange rates in Nigeria, he states. Going forward, it is expected that the inflows should increase with all the measures the government is taking to make Nigeria an attractive investment destination both for domestic and foreign investors.
While trade and migration barriers are going up, remittances from diaspora of low and middle income countries have confounded sceptics and also demonstrated that globalisation is yet alive.
The World Bank’s estimate of 2020 remittances beats its upwardly revised forecasts and the bank has raised its 2021 forecasts.
According to the estimates, while middle-income countries fell 2 percent in 2020 (compared to a forecast of -7%), the countries are expected to see a rise in remittances of around 3 percent in 2021.
Analysts say remittances growth is helping countries offset high commodity import bills or shortfalls in tourism flows as well as foreign direct investment, especially in Egypt and Pakistan.
