Nigeria risks increased dependency ratio as remittances dry up
Ensure efficient cash transfer mechanism, embrace digital technology
The discourse on the need to protect Nigerian households from negative impacts of the COVID-19 pandemic can never be over-emphasised. This is because the well-being of a people within a country mirrors the development of the country’s economy.
Beyond the direct effects of the pandemic on domestic businesses, jobs, lives and livelihoods, it is important for Nigeria’s policy makers to look into indirect impacts of the virus on Nigerians.
Countries have had their fair share of the ravaging impact of the pandemic on economic activities. There have been job losses and pay-cuts and all come back to hurt lower and middle income countries like Nigeria as diaspora remittances dry up.
Remittances are a vital source of income for developing countries. The ongoing economic recession caused by COVID-19 is taking a severe toll on the ability of people in Diaspora to send money home. This may linger if advanced economies are not able to shorten recovery time.
In Nigeria, remittances have become an important source of revenue both for government through tax and fees and for households. At household levels, it helps increase income and consumption smoothing.
Nigeria is the largest recipient of remittances, accounting for over a third of migrant remittance flows to Sub-Saharan Africa. It received $25 billion in direct Diaspora remittances between January and December 2019, as compiled by Nigerians in Diaspora Commission (NIDCOM). This represents about 6 percent of Nigeria’s GDP.
A World Bank study shows that remittances alleviate poverty in lower and middle income countries, improve nutritional outcomes, are associated with higher spending on education, and reduce child labour in disadvantaged households. A fall in remittances affect families’ ability to spend on these areas as more of their finances will be directed to solving food shortages and immediate needs.
It is pertinent to note that total direct remittances inflow into Nigeria declined significantly by 50 percent to $1.01 billion in February 2020. According to the World Bank, remittance flows are expected to continue declining as flows to low and mid-income countries in Sub-Saharan Africa have been estimated to fall by 23.1 percent.
For Nigeria, the consequence seems grave. Our fear is that the country may risk dependency. This is because, in our view, a decline in remittances will worsen the country’s poverty rate and further widen the existing inequality gap.
The National Bureau of Statistics (NBS) revealed in its Nigeria living standards survey for 2018/2019 that about 83.9 percent of Nigerians depend on cash remittances for consumption, 8.4 percent for school fees, 4.0 percent for hospital bills, 1.6 percent for Agricultural inputs, while others account for 2.2 percent.
With declining remittances, we see a switch in dependency to domestic households, hence, increasing domestic dependency ratio which, according to the NBS, is 0.97 percent of households, indicating more financial stress on the working class.
The dependency ratio indicator gives insight into the number of people of non-working age, compared with the number of those of working age. It is also used to understand the relative economic burden of the workforce, and has ramifications for taxation.
We suggest that, in order to mitigate the impact on vulnerable households, the government must provide additional social safety nets for the poor while ensuring an efficient and effective cash transfer mechanism.
Also, for those abroad, who can still afford to support family and friends, Nigeria must intensify its digital operations in lieu of traditional channels. The NBS survey revealed that the most common medium of cash remittances in Nigeria was through relatives which accounted for 65.3 percent of remittances received for 2019/2019. There could be a better channel.
Given the temporary ban on international travels across countries and the fear that people could get infected with coronavirus through banknotes without observing proper hygiene, we therefore encourage payments via digital money transfers.
Protecting households must remain the priority of Nigeria authorities and policy makers, especially at a time like this when the battle against the deadly virus isn’t ending soon.
Given the importance of Diaspora remittances on Nigeria’s GDP, the federal government must seek to achieve two major things: Help to keep a low dependency ratio and ensure uninterrupted flow in remittances by embracing digital technology.