The Central Bank of Nigeria announced on Friday that it was offering a Nara4Dollar initiative that will reward anyone who remits dollars via banks N5 for every $1 remitted.
However, data from the website of the central bank may provide further insight into why the central bank is embarking on such an unprecedented scheme which according to our analysis could add an extra premium on the prevailing black market rate.
The CBN reports Diaspora remittances in two of its research reports, Balance of Payment and Foreign Currency Flows. The BoP collates remittances the included cash and goods and services brought into the country by Nigerians in Diaspora.
The remittances included in the Foreign Currency flows are mostly if not all cash only and is perhaps the best proxy of just how much diaspora remittances in cash, the central bank has received through the official banking system.
The chart above sheds more light on why the CBN is gunning for Diaspora inflows.
In 2019, Nigerian abroad remitted a record $3.3 billion via official channels, the highest in the last 5 years. However, in 2020 where the exchange rate was devalued and the disparity with the black market rates widened remittances plummeted by as much of 61% from $2.8 billion Q3 YTD in 2019 to $1.09 billion same period in 2020.
This huge drop can be attributed to the effects of Covid-19 in the US, Canada, and the UK, where a lot of Nigerians live, and the disparity between the parallel market and the official exchange rates.
CBN’s data also indicate remittance figures from the balance of payment report have fallen drastically in 2020 compared to the same period in 2019. In the first 9 months of 2019 total workers remittances are reported as $17.5 billion compared to $12.8 billion in the corresponding period in 2020.
This represents a 26.8% drop further confirming the impact on the reliability of diaspora remittances for the country.
The data above perhaps explains why the central bank is keen on driving up remittances even if it means paying a premium for it. To buttress the reason for the initiative, the Central Bank claimed: “This new measure will help to make the process of sending remittances through formal bank channels cheaper and more convenient for Nigerians in the diaspora” hoping this will help boost liquidity in the retail end of the forex market.
The Central Bank in a series of tweets on Saturday cited a PwC report stating as follows. “PwC forecasts suggest that Nigeria’s remittance flows could reach US$34.89 billion by 2023. But this can only be accomplished if remittance infrastructure improves and if the right policies are put in place.”
Exchange Rate Disparity
Another possible and perhaps more plausible reason for the CBN’s Naira4dollar promo is its potential impact on the exchange rate. Sources at the central bank reveal to Nairametrics that the CBN strategy is that by giving beneficiaries of remittances an option to withdraw their money in exchange for cash incentive, it could create liquidity in the black market and therefore strengthen the exchange rate.
- For example, a beneficiary expecting $5,000 from a loved one in the diaspora will likely prefer the official route as they would withdraw the dollars and sell at the black market and then pocket an extra N25,000 in cash.
- However, it is highly unlikely that this promo will dent peer-to-peer transfers where a Nigerian who needs dollars abroad is willing to barter with another Nigerian in the diaspora who needs Naira locally.
- This market is said to be highly liquid and very popular amongst parents and guardians with wards schooling abroad. They also avoid some of the transfer charges associated with cross-border remittances.
The CBN is hinging on the relationship between incentives and the laws of demand and supply hoping this will drive liquidity at the retail end of the black market. While this is a plausible strategy there are more “known unknowns” than “known knowns” in the battle for closing the exchange rate disparity.
One “known unknown” is the impact of peer-to-peer wired transfers between parties with millions of dollars to transfer. The transactions occur outside Nigeria and often at a premium to black market rates. The CBN recently warned exporters that they will be kicked outside the banking system if they fail to remit dollar proceeds through official channels. That warning has so failed to step the slide of the naira.