Reflections on CBN’s naira-4-dollar policy

The circular issued by the Central Bank on March 5 2021 informing all banks, International Money Transfer Operators (IMTOs) and the general Public of a new Naira-for-dollar policy has been generating interesting discussions. Under the policy, which took off on March 8 2021 and will last till May 8 2021, in the first instance, the Apex bank said it would give N5 for every $1 remittance. In essence, under the policy, if one is transferring $1000 from the USA through the IMTOs, besides getting the money in cash in US dollars or have it transferred to the person’s domiciliary account, the person will additionally get N5,000 credited to his or her Naira account or receive the money in cash.

The CBN said the new policy will not only provide Nigerians in the Diaspora with cheaper and more convenient ways of sending remittances to Nigeria but will also increase the transparency of remittance inflows and reduce rent-seeking activities. It is equally expected that the new measure will encourage banks and financial institutions to develop products and investment vehicles geared towards attracting investments from Nigerians in the diaspora as well as enlarge the scope and scale of foreign exchange inflows into the country which will in turn help to stabilize the exchange rate.

Nigeria is one of the largest destinations for remittance flows in Africa. According to the World Bank, personal remittances from Nigerians in the diaspora totalled 5.3% of GDP in 2019 compared with a Sub-Saharan African average of 2.8%.It should be recalled that several actions have been taken in the past by the Apex bank to increase its foreign currency earnings and improve liquidity across the FOREX windows. For instance on 30 November 2020, the CBN directed all IMTOs to pay funds to beneficiaries of diaspora remittances in foreign currency as against the erstwhile Naira payment aimed at reducing pressure on the FX parallel market. It remains unclear the impact of the previous policy measures on remittance inflows.

In a keynote address to the Fidelity Bank’s Inaugural Diaspora Webinar on the Implications and Impact of the New FOREX Policy on Diaspora Investments early this month, the CBN Governor, Godwin Emefiele, noted that while the average cost of sending $200 worth of remittances to Nigeria from the United States is 4.7%, studies showed that even a 1% decrease in cost of sending remittances could result in a significant boost in inflows. He was further quoted as saying:

“Countries in South Asia such as Pakistan and Bangladesh are aware of this impact and they introduced reimbursement schemes to support inflows. In Pakistan the scheme which is known as free send has enabled record number of inflows of over $2bn a month even during the COVID pandemic.

“Bangladesh introduced its own scheme in June 2019, which is a 2 percent rebate on remittance inflows. Following this action, they have also seen a 20 percent boost in remittance inflows.”

A number of Nigerians and organisations have thrown their weight behind the CBN’s bullish stance on the new policy. For instance the Association of Bureau De Change Operators of Nigeria (ABCON),in welcoming the new policy, expressed hopes that the policy will ensure a competitive diaspora remittance market space that will in turn spur Naira stability. President of ABCON, Alhaji Aminu Gwadabe, reportedly said the new measure could help break the monopoly of certain players in the remittance spaces by allowing other relevant stakeholders like BDCs. Other supporters argue that it will incentivize Nigerian banks into designing more financial-services products for Nigerians in the diaspora.

There are several observations about the new Naira 4-dollar policy: One, without diminishing the contributions of the Diaspora remittances to Nigeria’s economy, the new policy creates a very worrying impression that the Naira becoming a stable currency will be largely dependent on inflows from the Diaspora. Such an impression outsources governance and management of the economy to the Diaspora. The truth is that the Naira becoming a stable currency will be more dependent on the government’s ability to effectively transform and manage the economy from its current high dependence on oil for its FOREX needs to a diversified economy with several sources of meaningful foreign exchange earnings through aggressive export support schemes. At the root of Nigeria’s FOREX problem are the country’s Balance of Trade (BOT) and Balance of Payment (BOP) deficits rather than remittance inflows from abroad.
Two, it is not exactly clear how the new dollarization of the economy policy will address the country’s Balance of Trade and Balance of Payment problems –which, as argued above, are at the heart of the pressure on our FOREX market. It should be noted that the new Dollar-4-Naira policy gives recipients the option of collecting the dollars in cash. In fact the IMTOs are mandated to pay dollars to the recipients through the banks. This not only raises questions about the dollarization of the economy but also about how the measure will address the more fundamental problems of balance of trade and balance of payment deficits.

Three, it should be borne in mind that how much the Diaspora can remit is often a function of the economic circumstances of their countries of domicile. This means that when the economies of their host countries are doing well, they are likely to have better paying jobs, and thus able to remit more. In essence, how much they can remit is largely determined by circumstances outside their control, raising the question of the effectiveness of the policy in raising the level of remittances. Additionally, a substantial portion of the Diaspora remittances are directed at meeting familial obligations such as taking care of aged parents and relatives or paying school fees for their siblings. With Nigeria becoming the poverty capital of the world, it can be surmised that many Nigerians in the Diaspora will feel even more obligated to help relatives and family members, meaning that Diaspora Nigerians are likely to continue remittances to meet their familial and societal obligations with or without the CBN’s Naira bonanza.

Four, based on the data from the World Bank, the country’s total direct remittance inflows have averaged $US21bn in the past 9 years. Extrapolating from this, it means that the CBN will be paying FOREX recipients through the IMTOs a whopping sum of some N17.5bn as incentives for the two months that the policy will be in effect. This raises a crucial question of whether this is money well spent or if the expected gains from this policy will be sufficient to justify this huge financial outlay, which, if judiciously spent on some sectors, such as aggressive export promotion, could have more beneficial and sustainable effect in attracting foreign currency earnings than the CBN’s new Naira-4-Dollar policy. This is in addition to concerns about whether the policy will not be unnecessarily rewarding FOREX earners while subtly devaluing the Naira.

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