May 20, 2021 / 09:14 AM / by FBNQuest Research / Header Image Credit: eBusiness
The CBN has extended its "Naira 4 dollar scheme" until further notice, and will be hoping for a strong recovery in remittances and therefore an easing of pressure on the naira exchange rate and the current account. The COVID-19 virus was widely seen as very damaging to remittances. In April '20 the World Bank saw a -19.7% fall on the previous year for low and middle-income countries. With the benefit of hindsight, the Bank has recently amended its estimate for last year to just -1.6%. Some countries have enjoyed an increase, notably Bangladesh and Pakistan which we show in today's chart. Both have posted y/y double-digit growth every month since June. From the start of their fiscal years in July '20 through to April, Pakistan has reported an increase of 29.0% y/y and Bangladesh 39.0%. Local analysts have cited restrictions on cross-border travel, the de facto cancellation of the Hajj in 2020 for non-Saudi nationals, Eid-related transfers and the proactive policies of governments and central banks as the main drivers.
There have been recoveries in remittances in Africa, too. In Kenya the y/y increase in remittances has picked up this year from 7.3% in January to 43.7% in April.
We have less timely data for Nigeria: in Q3 '20 inward remittances were running 32.8% below the year-earlier period. Nigeria was the sixth largest destination of remittances among developing countries in 2019 according to World Bank data, a ranking that now looks vulnerable.
Time will tell whether the CBN's incentive is adequate. In Bangladesh, for example, the central bank pays a 2% bonus on all remittances.
A rebound in remittances would be particularly welcome, given that Nigeria is developing a structural deficit on the current account. (Its last surplus dates from Q2 '18.) Net remittances amounted to USD3.87bn in Q3 '20, compared with USD1.67bn for net foreign portfolio investment and a paltry USD0.47bn for net foreign direct investment. The broader reasons for the structural deficit, as we have often noted, are a trend decline in oil production, rapid population growth and the slow pace of import substitution.
A central bank can offer other incentives for the diaspora. The State Bank of Pakistan issues sovereign certificates in local and foreign currency, both Shariah compliant and conventional. The one-year USD instruments currently pay 6.50% on an annualized basis.
Workers' remittances in USD (% chg; y/y)
Sources: Bangladesh Bank; State Bank of Pakistan; FBNQuest Capital Research