By Godwin Emefiele
I would like to thank the organisers for identifying a very topical theme. As we are all aware remittances from Nigerians living abroad has had a significant benefit on domestic income, social welfare and economic growth in Nigeria. Given the depth of skills that Nigerians in the diaspora possess, an effective engagement, with them is vital towards maximising the gains that they could make in supporting further investment and growth in Nigeria.
Our diaspora community given their ties to Nigeria have a vital interest in supporting the improved welfare of Nigerians at home. In addition, remittances are less volatile when compared to other forms of foreign investment, such as foreign portfolio investment, which could be prone to sudden reversals, and are influenced by external factors, such as changes in monetary policy by advanced countries.
Following the onset of the COVID-19 pandemic in 2020, emerging market countries witnessed a significant reversal of $100bn worth of financial flows, as investors retreated to safe-haven assets such as US treasury bills. Some analysts had expected a significant dip in remittances to emerging and frontier markets as a result of the slowdown in global growth in the first half of the year. This was not the case in countries such as Pakistan, Bangladesh, Mexico and India, where we saw a significant boost in remittances. The increased flow of remittances helped in mitigating the negative effects of the pandemic and the outflow of portfolio funds on their respective economies.
At the Central Bank of Nigeria, we understand its ramifications for exchange rate stability, reserve accretion, job creation, poverty reduction and economic growth. As a result, our policy aim is to broaden the scope and scale of diaspora inflows, while ensuring that those in the diaspora leverage formal channels in remitting funds, rather than informal channels that are more susceptible to fraud, in addition to poor safeguards for consumers that utilize these services.
One of the key elements of the Sustainable Development Goals is to increase the volume of global remittances as a percentage of GDP while reducing the cost of remittances. This aligns perfectly with the objective of the CBN and the Nigerian government. Following the recent outbreak of the COVID-19 pandemic, global remittance flows to developing countries is estimated to fall by 7.2 per cent to US$508 billion in 2020 and a further 7.5 per cent to US$470 billion in 2021.
Regardless of the global fall in remittance flows in 2020, they remain a major source of stable external financing for developing countries. According to the World Bank, flows to low and middle-income countries reached a record high of US$548 billion in 2019. This surpassed foreign direct investment, FDI, flows of US$534 billion and overseas development assistance of about US$166 billion.
Consistent with the global trend, Nigeria aspires to ensure that remittance flows and diaspora investments become a significant source of external financing. Over the years, foreign direct investments and, more noticeably, portfolio flows to Nigeria have exhibited volatilities, the reversals of which exert enormous pressures on domestic market conditions. Hence the need to boost remittance flow.
Today, the World Bank data shows that Nigeria, with a total flow of US$21 billion, was the seventh-largest recipient of remittances in 2019. This is behind India, China, and even Egypt. Though official remittance flows declined in 2020 due largely to the undermining impact of the COVID-19 pandemic, it maintained its dominance over FDI inflows.
Accordingly, the CBN strives to constantly improve our remittance infrastructure, ease the process of international money transfer and simplify the experience for senders and recipients. In this regard, we note that the efficiency of remittance services, especially as provided by the international money transfer organizations (IMTOs) are critical to our aim of boosting inflows. We would constantly seek to finetune our policies to mitigate factors that affect the quality-of-service customers face when using IMTOs.
The new FX policies: Distinguished ladies and gentlemen, many analysts are of the view that remittance flows to Nigeria may be largely underestimated given the unofficial transfer routes and incomplete reportage by remittance service providers. 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. Report of remittance inflows are grossly characterised and marred by irregularities as some money transfer operators unlawfully choose to under-report the inflows. Their mode of operation is to report less amount than what they received and thereafter pursue arbitrage premium by selling the unreported excess in other markets at different rates.
This is our definition of round-tripping, which is wholly illegal in Nigeria. Accordingly, and in view of the need to correct the observed irregularities, the CBN took decisive policy actions. These policies amended the procedures for receipt of diaspora remittances with the overall aim of improving the administration of remittance flows to Nigeria.
The key highlights of the New Policies are:
Beneficiaries of remittance flow through an International Money Transfer Organisation, IMTO, shall only receive such inflows in foreign currency (US dollars) through any bank of their choice;
Recipients have the sole decision to receive the foreign currency (US dollar) either in physical cash or instruct the bank to credit the fund to an ordinary domiciliary account, depending on their preference;
IMTOs are mandated to unambiguously disclose to remittance beneficiaries that such recipients have exclusive discretion to decide the mode of payment;
IMTOs must ensure that all funds received in favour of beneficiaries in Nigeria are promptly deposited into the agent bank’s correspondent account;
Furthermore, in an effort to reduce the cost burden of remitting funds to Nigeria by working Nigerians in the Diaspora, the Central Bank of Nigeria has introduced a rebate of N5 for every $1 of fund remitted to Nigeria, through IMTOs licensed by the Central Bank. This rebate will be provided to the bank accounts of beneficiaries, following receipt of remittance inflows. We believe this new measure will help to make the process of sending remittance through formal bank channels cheaper and more convenient for Nigerians in the diaspora. This new policy is expected to take effect on March 8, 2021.
What do we hope to achieve: Our policy on the administration of remittance flows is aimed at increasing the transparency of remittance inflows, reducing rent-seeking activities, and providing Nigerians in the diaspora with cheaper and more convenient ways of sending remittances to Nigeria. In addition, we believe that this new policy measure will encourage banks and financial institutions to develop products and investments vehicles, geared towards attracting investments from Nigerians in the diaspora. We have no doubt that these changes can help to finance a future stream of investment opportunities for Nigerians living abroad.
The use of reimbursements of remittance fees has been critical in supporting improved inflow of remittances to countries in South Asia and in improving their balance of payments position following the COVID-19 pandemic. Over the past three years, Bangladesh and Pakistan had embarked on separate but similar initiatives to reduce the transaction cost of sending remittances through formal channels. In June 2019, the Bangladeshi government launched an initiative to pay a percentage of the total amount remitted to beneficiaries in Bangladesh.
This scheme has helped to significantly improve remittance inflows. For example, between July 2019 and February 2020, Bangladesh received $12.5bn in inflows, reflecting monthly inflows of $1.5bn. Between July 2020 and February 2021, inflows using formal channels rose to $16.7bn reflecting average monthly inflows of $2.1bn per month notwithstanding the effects of the COVID-19 pandemic on the global economy.
In Pakistan, the Central Bank of Pakistan launched a remittance initiative scheme whereby the Central Bank offers a rebate on remittances to beneficiaries. In addition to the elimination of charges and significant marketing schemes, Remittances inflows into Pakistan exceeded $2.0 billion for the eighth straight month in January 2021 at $2.3 billion, up 19 per cent from a year earlier, according to a report from the Central Bank of Pakistan. The bank noted that the increased inflow of remittances using formal channels was due to incentives offered to their diaspora community.
We believe our efforts at driving remittance inflows into Nigeria would yield positive results as we strive to ensure formal banking channels offer cheaper, faster and more convenient ways for remitters to send funds to beneficiaries. Reducing the cost of sending remittances is a significant way to boost remittance inflows to Nigeria.
In general, the new policy is expected to enlarge the scope and scale of foreign exchange inflows into the country with a view to stabilizing the exchange rate and supporting accretion to external reserves. More importantly, it will provide an opportunity for Nigerians living abroad to make investments in their home country.
Yet, the introduction of the new policy presented new challenges as operators and remittance service providers were initially unable to integrate with the commercial banks. The CBN continues to work assiduously to resolve the few intermittent interface challenges that are remaining. We are brokering meetings between the IMTOs and banks in order to ensure that we have a smooth transition and our diaspora community have a more convenient way to remit funds to Nigeria.
Conclusion: I would like to emphasise that we recognise the significant role Nigeria’s diaspora community plays in supporting growth and development in Nigeria. It is in this regard and with a view to taking advantage of the huge opportunity from the diaspora community, that the CBN redefined its strategy through the recent FX policies.
We are convinced that the new FX policy, by creating an easier, more flexible, and more transparent, system of remittance administration, will greatly enhance the benefits of diaspora remittances in supporting investments and growth in Nigeria.
Being keynote address by Godwin I. Emefiele, CON, Governor, Central Bank of Nigeria at the Fidelity Bank’s Inaugural Diaspora Webinar on the Diaspora Webinar on the Implications and Impact of the New FX Policy on Diaspora Investments