• Monday, July 15, 2024
businessday logo

BusinessDay

Nigerians face liquidity squeeze as diaspora inflows dry up on COVID-19

dollar

Nigerian households dependent on families abroad risk increased liquidity squeeze this year as diaspora inflows shrink on the back of a health pandemic that has rendered millions of people in advanced countries jobless.

Africa’s largest economy rides on the gains of diaspora inflows to attract dollar liquidity from its over 1.78 million populace living abroad who send money to their families back home, but the global collapse of economic activities due to the pandemic could see such gains eroded as analysts foresee a huge drop in diaspora inflows.

Diaspora remittances into the country could fall to $17 billion in 2020, a 32 per cent drop from the $25 billion inflows recorded in 2019, according to projections by Financial Derivatives Company (FDC), a consultancy company led by renowned economist Bismarck Rewane.

When that happens, the country could witness an increased inequality gap, a further drop in standard of living and worsening poverty levels, according to Moses Hameed, research analyst at Lagos-based financial services firm, Investment One.

It would also put pressure on Nigeria’s reserve and inflict more pains on its economy at a time in which it needs more dollar inflows to keep its naira stable against the dollar and settle some of its dollar bills, Hameed said.

FDC’s projections of declining diaspora inflows align with that from the indigenous rating agency, Agusto &Co, which said that diaspora remittances into Nigeria in 2020 would plunge by 20 per cent, slowing to its lowest level in a decade, fuelled by the pandemic.

In a forecast released in May, The consulting arm of the rating agency noted that the projected drop will further put the naira under some more pressure.

“With an economic crisis in several western nations, Nigeria could see a slowdown. We are forecasting a 20 per cent drop in the diaspora remittances to $20 billion,” Agusto & Co. said.

Read also: COVID-19 Crisis: We need more than monetary policy to rescue the economy

Like other sources of liquidity inflows including oil receipt, foreign direct investments (FDI), foreign portfolio inflows (FPI) grants and external borrowings; diaspora remittances has been one of the biggest sources of dollar inflows into the country.

In 2019, diaspora remittances hit an all-time high of $25 billion from the $18.37 billion inflows recorded a decade ago.

That’s about 80 per cent of the federal government’s budget, 5 percent of Nigeria’s gross domestic product, and 10 times more the FDI flows in the same period.

But the high figures from diaspora inflows were only those made through official channels. Analysts believe the numbers might be more if inflows done through unofficial means were captured.

In Africa, Nigeria has led the continent with the most diaspora flows, and it was not until 2018 it dropped to second place behind Egypt.

The unprecedented growth in diaspora remittances is due to Nigeria’s youthful populace scattered around other countries in search of greener pastures.

Notably, the United States, United Kingdom, and Cameroon were the highest remittances sending countries to Nigeria, according to a 2017 PWC report which captured diaspora inflows into the country.

At that time, some $6.19 billion was sent into Nigeria from the U.S, while Nigerians in the UK and Cameroon sent in $4.1 billion and $2.5 billion respectively.

But for the virus outbreak which has forced analysts to reverse projections of inflows, the global consulting firm while analysing past trends, estimates Nigeria’s diaspora remittances could grow over a 15-year period to $29.8bn in 2020 and almost double its current size to $34.89 billion by 2023.

The downgrade in the outlook for diaspora inflows may appear plausible given the developments seen in the global economy.

The United States which is home to more than 280,000 Nigerian emigrants is fighting tooth and nail to contain the spread of the virus.

The world’s power is the hardest-hit country with the virus, with over 5.4 million confirmed cases, including 170,000 of which have died of the virus.

Despite a $2.3 trillion stimulus package, It’s economy suffered its sharpest downturn since at least the 1940s in the second quarter, highlighting how the pandemic has ravaged businesses across the country and left millions of Americans out of work.

Gross domestic product shrank 9.5 per cent in the second quarter from the first, a drop that equals an annualized pace of 32.9 per cent. Some 17 million Americans have also filed for unemployment benefits as of July 18, according to a Bloomberg report.

Similarly, the UK entered its deepest recession for the first time in 11 years, after its economy shrank by 20.4 per cent in the second quarter; while Some 1.2 million employers have taken advantage of the government’s Coronavirus Job Retention Scheme to furlough 9.6 million people at a cost to the government of 33.8 billion pounds ($44 billion).

The U.K is also home to more than 210,000 Nigerians, based on PWC data.

Already, the unemployment rate in Nigeria rose from 23 per cent in Q1 2018 to 27 per cent in Q2 2020, the highest in six years, worsened by the pandemic. This could heighten the country’s dependency ratio.

But with millions of people abroad becoming jobless due to the pandemic, it would affect their ability to extend the needed funds to families at home.

“There would be an increase in the number of people who are squeezed because of the income squeeze in developed countries like the US, Canada and UK which send a significant amount of remittance to Nigeria,” said Andrew Nelvin, chief economist at PWC.

“As such, it is going to be a difficult year and the country needs to create an investment climate that is good not just for the diaspora but also for Nigerians and non-Nigerians. Investment from channels such as diaspora remittance, FDI and FPI are important to be able to have a higher rate of inclusive growth in the country,” Nelvin said.

Diaspora inflow into Nigeria outstrip oil receipt

Since 2015, at the peak of the collapse in oil prices that started a year earlier, diaspora inflows through official means have continued to outstrip receipts from oil, considered the country’s major foreign exchange earner.

While Diaspora remittances into the country surged 20.6 per cent to $25.1 billion in 2018, from $20.8 billion in 2014, revenue from oil plunged 57.4 per cent to $18 billion in 2018, from as high as $42.7 billion in 2014, according to data obtained from the Central Bank’s quarterly reports and analysed by BusinessDay. These remittances naturally exclude transfers made through unofficial channels.

A similar trend was recorded in the preceding years of 2017, 2016 and 2015 when remittances stood at $22 billion, $19.7 billion and $21.2 billion, respectively, as against oil revenues of $13.4 billion, $10.4 billion and $19.6 billion, respectively, within the same periods.

This is contrary to the situation prior to 2015 when oil prices averaged around $100 per barrel and receipts from crude oil sales stayed well above Diaspora remittances. But with the increasing number of paid Nigerians abroad and a fall in crude prices, remittances overtook revenue from oil, accounting for more than 95 per cent of the total transfers.

Already, revenue from oil has taken a bite after a standoff between two of the world’s biggest producers of oil, Saudi Arabia and Russia, sent oil prices tumbling to as low as $17 a barrel.

The fall in petrodollars alongside huge outflows of portfolio investors has placed a strain on Nigeria’s reserve which has fallen to $35 billion as at Friday, 14, based on CBN data. The naira has weakened some 20 per cent against the dollar, trading around N475/$.

With diaspora inflows expected to decline, analysts foresee further pressure in reserve as the country gets fewer dollars.

Meanwhile, Charlie Robertson, Chief Economist at Investment banking firm, Renaissance Capital, said it is hard to know what will happen to remittances.

According to him, despite worries by the World Bank that diaspora inflows will fall by 20 per cent, it has risen fast in Pakistan and Bangladesh. However, if it eventually happens, a weaker currency would help offset the pain