Nigeria’s latest move to eliminate part of the barriers to the inflow of diaspora remittances will boost liquidity in the dollar-starved country, but the Central Bank of Nigeria (CBN) will need to swiftly follow up with more reforms to fully restore investor confidence and bring the biting dollar shortages, that have hobbled the economy, to an end.
Investors and analysts largely cheered the CBN’s policy shift on diaspora remittances and it has even been interpreted by some as a move that could pave way for a shift to the adoption of a market-determined exchange rate.
Nevertheless, much more needs to be done to complement the latest move and fix the country’s foreign exchange crisis, which is mainly supply-driven, according to economists surveyed by BusinessDay.
In the short term, they say the CBN needs to adopt a more credible FX policy, re-open the borders, correct the interest rate misalignment and consider an IMF stand-by facility like Egypt did to boost investor confidence and stabilise the exchange rate.
It is a good move in the right direction and I endorse it, Bismarck Rewane, CEO of Financial Derivative Company (FDC), said.
“By doing this, the CBN has given them unrestricted access to their money. Anything that reduces the number of restrictions on currency activities is a good move, as it will engender confidence. It is one of a series of moves. Eventually, unification of the exchange is the final solution,” Rewane said in a phone response to BusinessDay.
On his part, Gbolanhor Ologunro, an economist at Cordros Capital Limited, said, “There are still some structural issues in the economy that need to be addressed to boost exports and move the country away from the susceptibility of the oil sector.
“However, these are more long-term efforts that will take time.”
Many Nigerians abroad have avoided official channels to wire funds to families and relatives back home due to the country’s practice of multiple exchange rates.
For these Nigerians, it made no economic sense to use official channels where the naira is artificially pegged at a stronger rate against the dollar at N379/$, when they could make an extra N121 selling their dollars at the black market.
That has been a major setback for the CBN’s biggest economy in need of the greenback to meet the dollar demands of local manufacturers waiting to import key inputs for production.
Diaspora remittances into Nigeria fell by about 40 percent in the second quarter of this year, the lowest in almost a decade, according to data compiled by investment-banking firm EFG Hermes, as more Nigerians boycott official channels to patronise the parallel market where rates are more market reflective.
That is worse than the drop of 20 percent in Egypt and contrasts poorly with the improvements seen in Kenya, Sri Lanka, Pakistan, Bangladesh, and Morocco, EFG Hermes’ data show.
To correct this, the CBN on Monday amended the procedures for receipt of diaspora remittances, granting beneficiaries of these remittances options of receiving these funds in foreign currency cash or into their domiciliary accounts, at the market determining rates.
That is opposed to the former practice where receivers of these funds are forced to exchange the dollars at a rate lower than the market reflective rate.
According to the CBN, the adjustments are necessary to deepen the foreign exchange market, provide more liquidity, and create more transparency in the administration of diaspora remittances into Nigeria.
Following the tweak to the forex rules on diaspora remittances, the naira gained 4 percent from a four-year low of N510/$, which it touched on Monday, to N490/$, its biggest gain this year, according to BusinessDay data.
More reforms need to follow
While analysts that spoke with BusinessDay commended the move, they are of the view that it is not enough to fix the country’s liquidity crisis with unmet demand – backlog of dollar-denominated letters of credit- valued at $729 million, according to data by an auditing firm, KPMG.
According to them, fiscal reforms around the border openings to promote legitimate exports raise interest rates to tackle inflationary pressure and attract foreign portfolio investors, attracting private capitals.
Some also suggest the government to ask the IMF for a $10 billion facility, citing how a similar move by Egypt helped stabilise its FX market.
“To boost dollar liquidity in the medium to long term, the country would need to open its land borders, generate private capital, and sell-off or securitise some of its unproductive assets so as to generate revenue,” a Lagos-based analyst told BusinessDay.
“There is a need to improve productivity in the economy particularly agricultural produce and manufactured goods so we can de-risk our dollar earnings away from oil,” the person said.
Africa’s biggest economy has for over a year, shut its land borders in what it says is aimed at checking smuggling activities that are inhibiting domestic production of commodities.
But the aim of the closure has been futile with commodity prices skyrocketing to their highest level in almost three years. Local manufacturers with foreign markets have also been hit hard as they are unable to export finished products to other African markets.
Worst of this is the fact that the country has entered a trade treaty that will see it open up over its economy to over 90 percent of commodities coming in from other African countries.
Hit by a collapse in crude oil price occasioned by the coronavirus pandemic, wiping out more than half of the country’s dollar earnings, Africa’s biggest economy is challenged by a huge dollar crisis, forcing the central bank to adjust the naira.
For the third time this year, the CBN has devalued the naira, adjusting the rate licensed bureau de to change operators can sell the naira to N392/1$ from 386 the local currency was previously sold.
The economy has slipped into its worst recession in 33 years after contracting for two straight quarters (2nd and 3rd), with more of its population becoming poorer while unemployment has reached a record high of 27 percent, according to NBS data.
The economy would probably contract by 4.3 percent in the year if a prediction from the IMF is anything to go by.
According to the IMF, the country entered the pandemic with very weak macroeconomic fundamentals including ballooning debt profile, soaring inflation, deepening poverty, widening inequality, and falling standard of living.
Nigeria has an economic challenge that is significant and potentially severe, Doyin Salami, economist and head of the Presidential Economic Advisory Council (EAC), said.
According to Salami, the Federal and the State governments alone lack the firepower and would need huge private investments to move the needle in the country.
He wondered that in a world awash with $19 trillion in private capital, invested in negative-yielding assets, Nigeria still struggles to attract private investments to create jobs and grow its economy.
“Nigeria is a capital diffusion country and the access of the public sector to resources is not just diminishing but the prospect is not looking too good. Private sector capitals both international and domestic have to be relied upon if we are going to spur investments in any meaningful way,” Salami said last week in a conference with the theme: “Privatisation in Nigeria and the Outlook for Subnational Economic Development.”
“The country needs roughly 19 million jobs, and must grow at 6 percent annually in the next decade to tackle poverty and unemployment; and private investments must be at the heart of that growth,” Salami said, urging state governments to let out unproductive assets in their states to attract investment.
