By Babajide Komolafe
The price of crude oil has been on the upward trend since November 30 last year, courtesy of the production cut by OPEC+ and the recent drone attack on one of Saudi Arabia’s major oil facilities.
For example, the price of Nigeria’s Bonny Light crude oil rose steadily to $68.19 per barrel Friday last week from $46.67 per barrel on November 30, indicating a 46 per cent increase in about three and half months.
But this increase is not reflected in the nation’s external reserves. On the contrary, the external reserves had been falling since January 25.
Data from the CBN showed that the reserves fell for seven consecutive weeks to $34.59 billion on Friday, March 12 from $36.52 billion on January 25. This translates to a N1.93 billion decline in seven weeks.
This decline follows a five-week steady increase in reserves from $34.825 billion on December 17, 2019.
Explaining why the movement in the nation’s external reserves is not in tandem with the increase in price of crude oil, analysts at Agusto & Co, a Lagos-based rating agency, said: “Although oil prices have rallied in the first two months of 2021, hitting as high as $70 per barrel in March 2021, the country’s reserves have not grown at the same rate.
“Nigeria’s Eurobond redemption of $500 million and maturing swap transactions, rising costs from refined crude oil importation at a higher landing cost and the gradual settlement of pent-up forex demand continue to pressure gains from stronger oil prices.
“However, with an improvement in forex inflow from stronger oil prices and Central Bank of Nigeria’s unorthodox initiatives to attract dollar inflows, we expect an ease in forex illiquidity as pent-up demand for forex is met gradually.”
However, the contradictory trend in price of crude oil and the nation’s external reserves imply the need for additional measures to boost dollar inflow into the country.
Thus, for the second time in less than four months, the Central Bank of Nigeria, CBN, introduced another policy, Naira4dollar scheme, to increase diaspora remittance inflow into the country.
“The new policy is expected to enlarge the scope and scale of foreign exchange inflows into the country with a view to stabilising the exchange rate and supporting accretion to external reserves,” said CBN Governor, Godwin Emefiele.
The apex bank had earlier in December introduced a policy that allows beneficiaries of remittance inflow to receive cash payment in foreign currency of their choice.
In a circular announcing the policy in December, the CBN stated: “International Money Transfer Operators, IMTOs 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 (of payment either in cash or transfer) is at the sole discretion of the beneficiaries/recipients.”
The expectation of the apex bank is that the policy will help to deepen the foreign exchange market, provide more liquidity and create more transparency in the administration of Diaspora Remittances into Nigeria.
To complement this policy, especially in terms of encouraging diaspora Nigerians to patronise official channels for remittance transfer, the CBN introduced the Naira4dollar scheme on Saturday, March 6th.
Under the scheme, the CBN introduced a rebate of N5 for every $1 of remittance sent through licensed International Money Transfer Operators, IMTOs.
According to the apex bank, the rebate will be provided to the bank accounts of beneficiaries following receipt of remittance inflows.
Rationale for the New Policy
Explaining the rationale for the policy, CBN Governor, Godwin Emefiele said: “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 diaspora.
“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 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 investment vehicles geared towards attracting investments from Nigerians in diaspora.
“We have no doubt that these changes can help to finance a future stream of investment opportunities for Nigerians living abroad.”
Inspiration from abroad
Citing the experiences of other countries like Bangladesh and Pakistan, vis-a-vis the effectiveness of incentives in boosting remittance inflow, Emefiele said: “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 $12.5 billion 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 $2.1billion 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.”
Efficacy of New Policy
Speaking further, Emefiele expressed confidence in the efficacy of the new policy, saying: “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 stabilising 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.”
However, this optimism is not entirely shared by analysts and members of the organised private sector. In addition to commending the Naira4dollars scheme, they also highlighted challenges to the effectiveness of the policy.
Commending the CBN for introducing the Naira4dollar scheme, Director-General, Manufacturers Association of Nigeria, MAN, Segun Ajayi-Kadir, said: “In the face of it, the scheme should encourage Nigerians working abroad to remit more into Nigeria and thereby improve the forex inflow.
“However, we need to dimension the inflows which have historically been 70 per cent for family support and 30 per cent for other purposes, including real estate which carries the greater part.
“In order to yield more of the anticipated inflow for investment in productive activities, the CBN would have to work with the banks and other relevant government agencies to initiate portfolios and measures to point the remitters in that direction,” he said.
While also commending the new policy, Director-General, Lagos Chamber of Commerce and Industry, LCCI, Muda Yusuf, advocated further reforms vis-a-vis dollars from export proceeds and foreign portfolio investors.
He said: “This will surely have a positive impact on inflows and ultimately on the exchange rate.
“The current practice of imposing the Nigerian Autonomous Foreign Exchange Fixing, NAFEX rate on export proceeds should be discontinued in the spirit of the current move to incentivize forex inflows.
“Similarly, Foreign Direct Investments, FDI and Foreign Portfolio Investments, FPI should be allowed greater flexibility in conversion rates of their inflows.”
“A combination of these supply side strategies would have a remarkable impact on foreign reserves, forex liquidity and the naira exchange rate,” he said.
On his part, Director- General, Nigerian Association of Chamber of Commerce, Industry, Mines and Agriculture, NACCIMA, Ambassador Ayo Olukanni, commended the CBN noting that the Naira4dollar scheme, if properly implemented, would have positive impact on the nation’s modest exit from recession, boost foreign exchange input and result in reduction of pressure on the naira.
He said: “Diaspora remittances have always been identified as an important component of inflow of foreign exchange into the Nigerian economy. This is perhaps what inspired this Naira-4-Dollar scheme by the CBN.
“Annual figures in recent years range from 22 billion dollars in 2017 to 23.63 billion dollars in 2018 and the projection before COVID-19 was that it will go as high as 35 billion dollars by 2023.
“As the global economy rebounds and takes a new upward trajectory, I am of the view that this is why the CBN has taken this strategic option to encourage remittances from our diaspora which is quite huge and located across the world.
“Properly implemented, I think it may have a positive impact on our modest exit from recession, boost our foreign exchange input and hopefully result in reduction of pressure on the naira.”
While noting the new policy can lead to increase in forex supply and accretion to the nation’s external reserves, analysts at Financial Derivatives Company Limited, however, noted the challenge of malpractice like round tripping and arbitrage.
They said: “This initiative is expected to increase Diaspora remittances flow into the country, boosting forex supply. This will also stem the depletion in the gross external reserves level.
“As forex supply increases, we expect demand pressures to ease with a possible naira appreciation especially at the parallel market. Year-to-date, the naira has lost 2.55 per cent at the parallel market (currently trading at N482/$).
“More importantly, the new policy is likely to reduce the premium between the parallel market and the Investors & Exporters, I&E forex rates (currently at N71). It will also reduce the cost burden of remitting funds to Nigeria by Nigerians in the Diaspora.
“A potential risk to this development is that there will be attempts to roundtrip and arbitrage the system. In addition, the current pandemic and furloughs could cut deep into the inflows. This is because foreign remittance is largely dependent on the economic conditions in the global economy, particularly the originating countries.
“According to PWC, the bulk of Nigeria’s remittances flow came from the US, UK, Cameroon, Italy, Ghana, Spain, Germany, Benin Republic, Ireland and Canada in 2017.
“The good news is that all these countries are expected to recover from the COVID-19-induced recession in 2021 with an average growth rate of 4.3 per cent.
On their part, analysts, United Capital Securities, identified the parallel market exchange rate as a major challenge to the efficacy of the policy.
They said: “In our view, a N5.0 premium for each dollar deposit from remittances results in a deposit expense of 1.2 per cent, less expensive compared to the stop rate on Open Market Operation, OMO treasury bills auctions to foreign portfolio investors, which is intended to accomplish the same goal.
“With $34.7 billion in dollar reserves (as of March 12), the CBN needs at least $6 billion in foreign reserves to be comfortable enough in increasing the dollar.
“Thus, if this scheme succeeds, the strategy brings about the much-needed convergence of rates in the currency market.
“The downside, though, is the parallel market, where the currency continues to trade at a significant premium to the official rate.”