By Babajide Komolafe
Adeshola Akiniyi is one of the over 1.24 million Nigerians in Diaspora. He has been living in the United Kingdom for over 20 years.
Adeshola works 16 hours a day, spending most of the spare time shuttling between the three jobs, needed to generate earnings, from which he regularly sends money to his wife and three children back in Nigeria.
While his four dependents, who live in Abesan, Alimosho Local Government, may not be familiar with the word, ‘remittances’, they however know that most of the money they spent on foods, clothes, and school fees come from their dad who lives and works abroad.
Importance of Diaspora Remittances
In economic terms, this household income from relatives, friends, and living abroad is called foreign or diaspora remittances.
According to the International Monetary Fund, IMF, remittances include 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.
Like the Akiniyis, many households in Nigeria depend on remittances. According to the National Bureau of Statistics, NBS, six out of 100 households in Nigeria receive remittances from abroad. These households receive on average N84,741 diaspora remittances, with 80 percent spent on basic needs.
Remittances play an important role in the economy. According to a report by the renowned accounting firm, PWC Nigeria, remittances, “help poorer recipients meet basic needs, fund cash and non-cash investments, finance education, foster new businesses, service debt and essentially, drive economic growth.
“Empirical studies show that the primary benefits of remittances to recipient households is the improvement in their general welfare. According to analysts, 70 percent of remittances are used for consumption purposes, while 30 percent of remittance funds go to investment-related uses”
Global Statistics on Remittances
Data from the World Bank showed that global remittances grew by 10 percent to $689 billion in 2018 from $633 billion in 2017 with developing countries receiving 77 percent or $528 billion of the total inflows.
The World Bank also showed that remittances to developing countries rose further by 4.9 percent to $554 billion in 2019.
In Sub Saharan Africa, which include Nigeria and 47 countries, remittances rose by 4.3 percent to $48 billion in 2019 from $46 billion in 2018.
World Bank data also shows a rising trend in diaspora remittances into Nigeria. From $20.8 billion in 2014, remittances into Nigeria rose to $25.1 billion in 2018, translating into 4.3 percent growth.
This growth resulted from a series of foreign exchange reforms by the Central Bank of Nigeria (CBN), including licensing of additional 65 International Money Transfer Operators (IMTOs) in 2016.
Highlighting the impact of remittances on Nigeria’s economy, PWC noted that the $25.1 billion remittances inflow in 2018 translates to 83 percent of the Federal Government budget in 2018 and 11 times the Foreign Direct Investment (FDI) flows in the same period.
Nigeria’s remittance inflows was also seven times larger than the net official development assistance (foreign aid) of $3.4 billion received in 2017.
Diaspora Remittances Leakages
However, the World Bank noted that the remittances reported represent official records, and are lower than figures of total inflow through formal and informal channels. A study by the bank indicated that remittances through informal channels could add at least 50 percent to the globally recorded flows.
For Nigeria this translates to about $7.5 billion additional remittances based on the figure for 2018 above.
This represents a huge foreign exchange leakage and portends serious implications for the economy, especially at a time of declining foreign exchange earnings from crude oil, which accounts for over 80 percent of the nation’s foreign exchange earnings.
The impact of the declining foreign exchange earnings is reflected in the sharp fall in external reserves to $34.89 billion as December 12th, 2020 from
From $38.59 billion at the end of 2019, as well as the 9.4 percent depreciation of the naira in the Investors and Exporters (I&E) window between January and December 2020.
Furthermore, Nigeria experienced a decline in diaspora remittances in the first half of 2020, due to the severe impact of COVID-19 pandemic induced economic lockdown on incomes of migrant workers globally.
According to the CBN, remittances into the country fell by 23.4 percent, year-on-year, to $9.1 billion in the first half of the year (H1’2020) from $11.82 billion in H1’19. This is above the World Bank estimate of 20 percent expected decline in remittances inflow into developing countries in 2020 due to the impact of the COVID-19 pandemic.
CBN’s New Policy on Diaspora Remittances
Recognising the implications of the above to the nation’s economy, the CBN recently introduced new policy measures in the country’s remittance programme.
The new policy measures, the CBN explained, “are designed to boost and facilitate an efficient flow of remittances sent home by Nigerians in the Diaspora.”
Under the new policy, recipients of diaspora remittances will receive the proceeds through designated banks of their choice. Such recipients of remittances may have the option of receiving the funds in foreign currency cash (US Dollars) or into their ordinary domiciliary account.
“IMTO’s must ensure that all funds in favour of beneficiaries/recipients in Nigeria be deposited into the Agent Banks‘ correspondent account.
“Agent Banks (Deposit Money Banks) in Nigeria will be responsible for the payment to beneficiaries/recipients either in foreign currency cash (USD) or into the beneficiaries/recipients’ domiciliary account in Nigeria.
“The mode (if payment either in cash or transfer) is at the sole discretion of the beneficiaries/recipients”, the CBN said in a circular signed by Mr. O. Nnaji, Director, Trade and Exchange Department.”
Prior to the new policy unveiled on November 30th, recipients of diaspora remittances were paid in naira at an exchange rate determined by the banks and the International Money Transfer Operator (IMTO).
The apex bank however realized that this arrangement was exploited by the IMTOs to the detriment of the recipients, and hence discouraging Nigerians in Diaspora from using official channels to send remittances into the country.
Explaining, CBN Governor, Godwin Emefiele said: “We analyzed data on IMTO inflows into the country over the past year, and through our investigations discovered that some IMTOs, rather than compete on improving transaction volumes and create more efficient ways for Nigerians in the Diaspora to remit funds, resorted to engaging in arbitrage arrangements on the naira-dollar exchange rate, which to a large extent resulted in a significant drop in flows into the country.
“It also encouraged the use of unsafe unofficial channels, which also supported diversion of remittance flows meant for Nigeria, thereby undermining our Foreign Exchange management framework.”
Benefits of the new policy
Emefiele further explained that the new policy, which commenced on Friday, December 4th, will deepen the foreign exchange market, provide more liquidity, and create more transparency in the administration of Diaspora Remittances into Nigeria.
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“In addition, these changes would help finance a future stream of investment opportunities for Nigerians in the Diaspora, while also guaranteeing that recipients of remittances would receive a market-reflective exchange rate for their inflows”, he added.
Also highlighting how the new policy will impact the economy, analysts at Financial Derivatives Company Limited, said: “This decision by the CBN will encourage remittance inflows through official channels and possibly reduce forex smuggling and arbitrage practices in the country significantly.
“In addition, some analysts describe it as a game-changer as it could help address the imploding problems of forex scarcity and the widening balance of trade deficit.
“A possible increase in forex supply will boost the CBN’s ability to support the currency and clear its forex demand backlog. The naira could appreciate against a basket of other currencies, particularly the US dollar.
“This coupled with the African Continental Free Trade Agreement (AfCFTA) and the possible reopening of the land borders could reduce imported inflation significantly and further taper prices of finished food imports/ commodity prices.”
The impact of the new policy on the nation’s foreign exchange market was reflected by the five percent or N30 appreciation of the naira in the parallel market three days after the policy was announced.
Between Monday, December 1st and Wednesday, December 3rd, 2020, the parallel market exchange rate dropped to N470 per dollar from N500 per dollar prior to the announcement of the policy.
The sharp appreciation of the naira according to Aminu Gwadabe, President Association of Bureaux De Change Operators of Nigeria (ABCON) shows the effectiveness of the new CBN’s rules receipt of diaspora remittances.
He said: “Certainly, those hoarding foreign exchange better sell now otherwise they will lick their wounds.”
Commenting further on how the new rule will impact dollar supply and the activities in the BDC subsector, Gwadabe said: “The monopoly of (banks) is broken and the policy will induce liquidity in the BDC subsector.
“It is true that the volume of diaspora remittances amidst COVID-19 19 is still huge. In fact, other countries like Kenya and Zimbabwe are recording higher diaspora remittances inflow as a result of skillful medical doctors abroad.
“Nigeria is expected to close the year with over $20 billion diaspora remittances despite the pandemic in 2020.
“The beneficiary is free to collect his proceeds in foreign cash currency and trade it in the BDC sub-sector which will lead to true price equilibrium in the market.”