A decline in workers’ remittances under life with the Covid-19 virus has added to the weaknesses in Nigeria’s balance of payments (BoP). The weaknesses predate the pandemic since the current account has now been in deficit for nine quarters in succession. This has removed one of the pillars of the narrative that Nigeria has a sound external balance sheet: the story ran that oil export earnings covered imported goods and services except in rare periods when the crude price tanked.
We learn from CBN data that net remittances amounted to US$18.8bn in the 12 months to Q3 2020, a decline of 21 per cent on the year-earlier period. To highlight the importance of remittances, we note that net foreign direct investment (FDI) and foreign portfolio investment (FPI), liabilities adjusted for assets on the BoP, came to US$1.0bn and -US$9.3bn (negative) in the same 12 months.
The only positive for the BoP is that the net outflow on services has fallen sharply during Covid because of lockdowns and other restrictions in Nigeria and across the world. The benefit is temporary since, whenever the global economy reopens, Nigerian residents will again be claiming the fx allowances for business trips, education and healthcare abroad. (The rationale for such is a subject for another day under a pseudonym.)
In April the World Bank anticipated a fall of 23per cent in remittances to sub-Saharan Africa (SSA) for 2020 on the back of job losses and worse employment terms for migrant workers. This proved a good call for Nigeria although the trend has proved positive in several cases. Remittances of US$2.5bn in Kenya in January-October represented an increase of 9 per cent y/y.
Read Also: Liquidity surfeit in financial market as CBN issues N4.1trn special bills
South Asia has also defied the predictions. There has been stronger growth in remittances to Pakistan and Bangladesh, the latter reporting record fx reserves last week. There is a theory, however, that this growth has been swollen by bank transfers made by nationals of the two countries leaving Saudi and other Gulf states permanently, and not, therefore, remitting strictly speaking. Another factor may have been the remitting funds they would have deployed for making the Hajj pilgrimage, which was much reduced due to the pandemic. Last week the Bank revised its forecasts for global remittances and estimated the decline in 2020 in SSA at 9 per cent, and in South Asia at 4 per cent. We should say that the data are highly fluid, not least due to definitional challenges.
We can only speculate why Nigeria has underperformed. The geographical location of the diaspora could be significant. The UK and the Eurozone economies fared rather worse than the US last year, and the Kenyan diaspora has a larger presence relatively in North America than the Nigerian.
Would-be Nigerian remitters may have assessed the domestic economy and decided to put projects such as house building on hold. If they were paid a small bonus on the conversion of the remittance into naira, as is paid by the central bank in Bangladesh, they may have proceeded nonetheless. Perhaps they looked at the exchange rates available through official channels and made alternative arrangements. The average cost of making remittance to SSA, calculated by the Bank at 8.5 per cent in Q3 2020 on a smallish transaction, is already the highest of any region. It is too early to see whether the CBN’s new regulations of late November, the foremost of which allows beneficiaries of remittances to be paid in cash (US dollars) or in their domiciliary accounts, have made an impact.
They may yet make a strong recovery and challenge the peak of US$6.3bn for net remittances in Q4 2018. Either way, the sharp fall in Q2 and Q3 last year has added to BoP vulnerabilities. The quickest way to overcome the weaknesses would be a sizeable rise in oil export earnings. Any student of Nigeria, oil economies in general and the Dutch disease know that this would not be a lasting solution.
A long-term solution could take a number of forms including the development of non-oil exports, along with reforms by the FGN enabling the business to take advantage of the African Continental Free Trade Area; import substitution with FGN incentives and the start of private-sector petroleum refining; exports of services such as tourism, outsourcing and insurance for job creation and to reduce the steadily rising net outflow, which reached US$33.8bn in 2019.
A combination of these steps would trim, and hopefully eliminate, the current-account deficit. This, in turn, would lower the profile of the CBN’s chase after FPI (hot money), which has exchange- and interest-rate implications. The chase would be less important in any case if Nigeria had a better record for attracting FDI than the pitiful 0.8 per cent of GDP (gross) it managed in 2019. This would be another long-term solution to create a robust BoP with the necessary shock-absorbers.
