CBN's launch at the weekend of its "Naira 4 dollar scheme" to boost the inflow
of workers' remittances has prompted parallels with Bangladesh and Pakistan. In
Nigeria's case and heavily driven by the COVID-19 virus, remittances in Q3 '20
were running 33% below the year-earlier period (Good
Morning Nigeria, 05 Mar '21) whereas they have grown at double-digit levels
y/y in the two South Asian states since June last year.
The CBN has now gone down the route of offering incentives, although only up to 08 May. The South Asian schemes predate the virus, being launched in 2019. The two states, particularly Pakistan, are popular with EM equity investors and therefore enjoy fx inflows from a source that currently generates little for Nigeria.
The CBN will bear the cost of a NGN5 bonus for every USD1 remitted by a licensed sender and collected by the designated beneficiary. In Bangladesh, the central bank pays a 2% bonus for all remittances. Transfers below TKD500,000 (USD5,910) do not require documents of the beneficiary, and in December, the requirements for larger transactions were much reduced. For Pakistan, approved sending bodies waive their remittance fees for transactions above a threshold.
A strong rebound in remittances to Nigeria would be welcome for the boost to household consumption and to small-scale construction. It would also ease the pressure on what is fast becoming a structural deficit on the current account due to the steady deterioration in the terms of trade.
The de facto cancellation of the Hajj for non-Saudi nationals last year may help to explain the surge in remittances y/y in June and July in our chart. Unable to embark on the pilgrimage, our thinking runs, the diaspora in both countries increased their payment orders in lieu.
For both Bangladesh and Pakistan, the largest sources of remittances are Saudi and the UAE. It may be significant that the economies of both countries contracted in 2020 at levels much closer to the US than the much higher figures emerging from the UK and the Eurozone, which are more important for Nigeria in terms of remittances.
We do not pretend that the parallels are complete. In particular, the differential between the rates at NAFEX and on the parallel market may be such that the CBN chooses to add to its incentive and extend its validity. That said, the CBN has been well-advised to experiment.
Workers' remittances in USD (% chg; y/y)
Sources: Bangladesh Bank; State Bank of Pakistan; FBNQuest Capital Research