The business of rewards for remittances

According to the World Bank’s Migration and Development Brief, released in May, officially recorded remittance inflows to low and middle-income countries are set to increase by 4.2 percent this year to $630 billion. For sub-Saharan Africa (SSA), the Bank projects a 7.1 percent rise. It highlights the reforms and incentives in Nigeria, the leading destination in the region, and soaring food prices across the continent as the drivers behind the projected increase.

The relative importance of remittances in economic development and the balance of payments have expanded significantly in recent years in almost all economies. In Nigeria’s case workers’ remittances (once we have stripped general government transactions out of current transfers) amounted to $5.2 billion in Q1 ’22. This far exceeds foreign portfolio investment of $1.6 billion and foreign direct investment of -$200 million (negative) in the same period.

Given the said flight to ‘safe havens’ in the current global headwinds and some self-inflicted policy wounds, we can assume that direct and portfolio investment in SSA is set to decline in the short term. As for remittances, the pandemic has had some varying consequences. The total for Nigeria in Q1 ’22 was 20.3 percent ahead of the comparable year-earlier period yet still 8.5 percent behind the pre-pandemic figure for Q1 ’20. In contrast, the $2.0 billion posted in Kenya for H1 ’22 was 39.7 percent ahead of the first half of 2020.

Some remarkable numbers have emerged from South Asia. The total of $21.0 billion in Bangladesh in the 2021/22 fiscal year (July-June) represented a 15.1 percent y/y fall but was nonetheless 15.5 percent ahead of total remittances in 2019/20. The decline in 2021/22 we attribute to one-off transfers the previous year by Bangladeshi nationals leaving Saudi and other Gulf states at the height of the slowdown in the pandemic. Another factor was probably the cancellation of the hajj for non-residents of Saudi during the pandemic and the anecdotal evidence that Bangladeshi nationals globally increased their remittances because they could not make the pilgrimage.

A similar trend is discernible in Pakistan. Total remittances of $7.14 billion in Q1 ’22 were 1.8 percent lower y/y yet 26.8 percent ahead of the pre-pandemic Q1 ’20.

The different outcomes can be traced largely to incentives. The central bank in Bangladesh introduced a 2-percent bonus for recipients before the pandemic and increased it to 2.5 percent in January. For transfers above a threshold of about $5,500 the recipient has to meet stringent documentary requirements: these would be a small minority of transfers. Below the threshold he/she can take the bonus in cash or in their bank account.

Pakistan operates a system of loyalty points (Sohni Dharti) for remittances, launched in November 2021. The points can be used for selected public services such as airline tickets and import duty on vehicles, and can be transferred from the remitter to the beneficiary in Pakistan.

They are awarded within three tiers: annual remittances above $30,000 attract points equivalent to 1.5 percent of transfers, those below $10,000 the equivalent of 1 percent. Access to the scheme is via a smartphone app. This is not the only incentive offered by the State Bank of Pakistan, so a direct comparison with the bonus scheme in Bangladesh is not valid.

Read also: Contradictions of Nigeria’s remittance industry

Despite official claims to the contrary and the apparent endorsement of the Bank, the CBN data we have already cited suggests that the ‘naira 4 dollar scheme,’ launched in March 2021, has been a limited rather than a resounding success.

Remittances inflows have not yet returned to pre-pandemic levels unlike the experience in Kenya, Bangladesh and Pakistan. The bonus could be more generous of course but the explanation is more the huge (and widening) gap between the NAFEX/I&E window rate and the parallel market.

Even before the latest slide beyond N700 per USD, there was every incentive to make inward transfers outside official channels. This is one of the least flagged negatives in current exchange-rate policy.

Another factor for the underperformance (and not peculiar to Nigeria) is the cost of remittances. The World Bank puts the cost of remitting $200 to SSA destinations at an average 7.8 percent, compared with 6.0 percent globally. It is unclear if the Bank has surveyed only traditional international money transfer operators (IMTOs) or included the many digital alternatives.

We could add the untested theory that a remitter in the diaspora is more likely to increase his/her transfers if the economy ‘at home’ is robust. The case for building a house is stronger if the asset is to increase in value as well as provide accommodation for friends and family. If the home government is creating wealth and jobs, the argument for returning/retiring as a ‘repat’ is also stronger.

What we see is that governments and central banks need to be more generous and imaginative with their incentives to attract remittances. A scheme of loyalty points akin to the offering from supermarkets and petrol stations has its merits.

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