The Central Bank of Nigeria (CBN) has made concerted efforts to intervene in the real sector through the numerous intervention funds made available to sustain the economy, especially during the Covid-19 hysteria that effectively halted global economic activities in 2020, driving the economy to a recession. In the same year, Nigeria’s Foreign Exchange (FX) reserves fell from US$38.5bn to US$35.37bn due to an FX shortage, which increased pressure on the reserves from manufacturers and foreign investors seeking to repatriate their funds.
Although this FX shortage has been largely attributed to the pandemic-induced crash in global oil prices and production/demand, it is also due, in part, to the large decline in remittances which had been a substantial contributor to FX in the country and had surpassed oil revenues for four consecutive years, from 2014 to 2018.
According to the International Monetary Fund (IMF), remittances represent household income from foreign economies arising mainly from the movement of people to those economies. They mostly consist of cash and non-cash items that flow through formal channels such as electronic wire, or through informal channels, such as money or goods carried across borders. When computing remittances, the IMF takes into consideration money that comes in directly as flows and the earnings of Nigerians in Diaspora in different parts of the world. This is unlike the CBN’s computation of remittances which only reflects the direct FX remittances into Nigeria.
Historically, remittances into Nigeria have been on an upward trajectory since 2010. The CBN reports that direct remittances through official channels grew from $5.8bn in 2010 to $19.1bn in 2020, a 70 percent year on year growth rate from $11.2bn received in 2018. Concurrently, the World Bank states that total remittances into Nigeria grew from $20.6bn in 2010 to $23.8bn in 2019, amounting to 5.3 percent of GDP and 7 times the FDI flows in the same year.
This changed in 2020 when yearly remittances had a sharp decline. The World Bank reports that total remittance into Nigeria in 2020 was $20.97bn, 11 percent less than the 2019 figure and the lowest total inflow since 2016. However, direct remittances into the country declined much further, as the CBN reports that total direct remittance in 2020 was $5.5bn, a 71 percent reduction from 2019 and the lowest since 2013.
The World Bank had previously predicted a 23.1 percent reduction in remittances for sub-Saharan African countries in 2020. Direct remittances into Nigeria seem to have declined further than previously projected, unlike Kenya’s remittances which saw a 10.7 percent increase within the same period due to financial innovations that provided Kenyans in the Diaspora more convenient channels for their transactions.
Remittances can have a significant impact on economic growth and poverty reduction. In addition to improving the general welfare of recipients, remittances also help to increase foreign exchange liquidity and reduce dollar shortages within the country, thus making funds available for importation of goods and raw materials to sustain businesses.
What caused the reduction in remittances?
Different theories abound as to the reason for the reduction in direct remittances to Nigeria. One often cited reason is the impact of the COVID-19 pandemic on the economies of countries like the United States and the United Kingdom, which house the largest group of Nigerians in Diaspora. In the US that supplies about one third of the total volume of remittances to Nigeria, unemployment spiked to its highest rate since the WWII era in 2020 and GDP contracted by 3.5 percent. Likewise, GDP in the UK, which houses the second largest contributors of remittances to Nigeria, declined by 9.9 percent in 2020, the largest fall since 2009. However, this economic decline does not explain the huge disparity between the decline in direct inflows recorded by the CBN and the decline in total remittances.
The CBN has attributed the drop in direct inflows to International Money Transfer Operators’ (IMTOs) practice of engaging in arbitrage arrangements on the Naira-dollar exchange rate, instead of competing on improving transaction volumes and creating more efficient ways for Nigerians in the Diaspora to remit funds. However, these arbitrage arrangements hardly started in 2020, and while they might explain the general disparity between IMF computed remittances and the CBN’s figures over the years, they do not explain the large gap between the 2020 remittance figures.
The reduction of direct remittances might be better explained by the 2020 exchange-rate regime, in the sense that remitters of inflows sought other avenues of remittance due to the perception that recipients were not getting the “full value” of their remittances in naira due to the widely varied exchange rates and tightened money transfer rules in 2020.
Seemingly in support of this assertion, Paxful, the largest Peer to Peer (P2P) trader in Africa recently stated that a popular use case for Nigerians who make up a quarter of its customer base (1.3 million registered accounts) is remittances, as bitcoin transfers are “much cheaper and faster than using traditional money transfer operators.” In 2020, Bitcoin trading in Nigeria reached an all-time high, and Nigeria emerged as Africa’s biggest cryptocurrency market with $352 million in P2P trading during the year.
How is the CBN working to increase remittances?
The CBN recently issued a series of circulars and instituted several policies to increase the inflow of remittances from Diaspora. According to the CBN, these policies were introduced to promote transparency, grow Diaspora remittances, and significantly improve foreign exchange inflows into Nigeria.
The first two of these circulars, issued on 30 November 2020, stated that recipients of remittances through IMTOs would now receive such inflows in USD, through the Deposit Money Banks (DMBs) of their choice. These recipients would also have the option of receiving the funds in cash or by direct transfer into their domiciliary accounts. Funds received by electronic transfer would be available for unrestricted use while domiciliary accounts funded by cash deposits would be subject to existing regulation restricting usage of such funds to withdrawal only.
Mixed reactions followed the issuance of these circulars, leading the CBN to issue yet another circular on December 2, 2020, to clarify its position. In this new circular, it stated that recipients would choose their preferred mode of receiving their USD remittances and the IMTOs would be responsible for depositing such USD remittances into the Agent Banks’ (DMBs) correspondent account, after which the DMBs would be responsible for payment of USD to recipients by preference. Following this directive, the CBN instructed all DMBs to close Naira general ledgers through which the Naira remittances were hitherto being carried out to prevent the diversion of remittance flows.
Additionally, the CBN issued a directive on December 16, 2020 mandating all switches, processors, mobile money operators and PSPs to immediately cease local currency transfers in respect of foreign remittances through IMTOs, disable receipt of funds from IMTOs and cease integrating their systems with IMTOs to prevent the comingling of remittances with other legitimate transactions.
Subsequently, on January 22, 2021, the CBN issued another circular setting out the modalities for the payout of Diaspora remittances. The new circular was issued owing to the disregard of the CBN directives by IMTOs. In the new circular, the CBN reiterated its previous statements regarding the disbursement of remittances by licensed IMTOs in USD alone and warned that individuals and institutions found in contravention of these guidelines would be sanctioned severely.
Analysts believe that this series of directives by the central bank could potentially reduce the disparity between the parallel market and official I&E windows. According to this theory, if more Nigerians are able to sell their dollars at the rate that they want then this could create more liquidity thus reducing the exchange rate disparity.
The most recent circular, issued on March 5, 2021, introduced the “Naira 4 Dollar” scheme. It stated that, starting from March 8 to May 8, 2021, all recipients of Diaspora remittances through approved IMTOs and commercial banks would receive N5 for every USD received as remittance inflow. The CBN governor, who announced the introduction of the initiative, said its aim was to increase incoming flows of foreign currency, and in the process support exchange-rate stability.
In addition, the CBN released a letter on February 5, 2021, reiterating its prohibition of cryptocurrency dealings and facilitation of payment for cryptocurrency exchanges. The letter also instructed all banks and other financial institutions to identify entities transacting in cryptocurrency and close accounts of such entities.
Implications of these policies
The CBN policy on the disbursement of FX remittance through IMTO has been heralded as a welcome development to bridge the gap between the parallel market and the official rate.
The policy is expected to send a message of transparency to Nigerians in Diaspora on how to get a fair value for their FX exchange and consequently encourage more remittance inflow into the country with CBN targeting about $2bn remittances monthly. It is also expected to centralize the system and cut off all unofficial channels, through which Diaspora remittances were previously made, which led to the disparity between direct inflows and total remittances computed by the IMF.
Following the implementation of the policy in November, the exchange rate at the parallel market improved slightly as the US dollar exchanged for N465/US$ as of 28 December compared with N500/US$ on 30 November 2020 before the implementation of the policy. In addition, the month-on-month total direct remittance increased from $92.2m in November to $214.2m in December 2020.
The Naira 4 Dollar initiative is also expected to have a positive effect on remittances. Although some analysts worry that the incentive will see tax-payers funds going to reward forex earners and lead to a subtle devaluation of the Naira, its potential for positive impact on remittance inflows cannot be denied. The policy is expected to reduce the cost burden of remitting funds to Nigeria and encourage Nigerian banks to design more financial-service products for the Diaspora, thereby letting the CBN achieve its objective of increased remittances. Pakistan and Bangladesh, which have similar policies, saw double digit growths in their remittances in June 2020, despite the pandemic.
On the other hand, the Naira 4 Dollar strategic effort may be perceived as a last-ditch effort to shore up reserves given other mechanisms have not proven to be effective. Furthermore, in this economist’s view, the level of M1 and M2 is currently elevated when compared to October 2020 figures. In other words, the amount of liquidity in the financial system is driving inflationary pressures and what is worse is the mechanism to remove monies from circulation is expensive and may likely continue to exacerbate the issue of liquidity. To be sure, there are other factors affecting inflation such as farmer/herdsman clashes, blockage of food from the northern parts of the countries to the south amongst other issues.
The ban on cryptocurrency might drive some cryptocurrency traders away from financial institutions and cause them to rely on peer-to-peer transactions in financing trade. However, when combined with the Naira 4 Dollar incentive, it is more likely to drive remitters to use official channels in remitting funds to Nigeria.
Concluding Remarks
Without access to foreign exchange, manufacturers cannot import the raw materials or components they need, traders cannot import goods for retail and businesses struggle for survival. The CBN’s policies on Diaspora remittance, when combined with the growth outlook for the US and UK and the ban on cryptocurrency, would most likely lead to increased remittance of funds into the country from the Diaspora.
One can make a case that the CBN has their hands full in stabilizing the economy. Evidence can be observed in the Q4 Economic report published by the CBN. They have traditionally been the Bankers of last resort. However, since the Covid-19 pandemic, we have witnessed the CBN active in numerous sectors as regulators and operators. I suppose the jury is not back yet to determine the effectiveness of the intervention programs. Nevertheless, it is assumed that without their intervention, the country would have been worse off.
Prof. Joseph Nnanna is Assistant Chief Economist, Development Bank of Nigeria.
