In a bid to sustain the increase in Diaspora remittances into the country, the Central Bank of Nigeria (CBN) has introduced a 'Naira-4-Dollar' promo. The promo, which takes effect from March 8, 2021 and ends on May 8, 2021, offers recipients of Diaspora remittances N5 for every $1 received as remittance inflow through licensed International Money Transfer Operators (IMTOs).
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 (currently at $34.88bn as at March 4).
Nigeria was the 7th largest recipient of remittances in 2018 behind India, China, Mexico, Philippines, France and Egypt. However, the World Bank projected a $2bn drop in Diaspora remittances into Nigeria to $21.7bn in 2020 from $23.8bn in 2019, due to the impact of the COVID-19 pandemic and the attendant economic crisis.
As forex supply increases, we expect demand pressures to ease with a possible naira appreciation especially at the parallel market. Year-to-date, the naira has lost 2.55% at the parallel market (currently trading at N482/$). More importantly, the new policy is likely to reduce the premium between the parallel market and the IEFX 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-induced recession in 2021 with an average growth rate of 4.3%.
More than anything else, efforts should be geared towards boosting forex inflows by scaling up non-oil exports. This requires sector specific policy initiatives to attract investors and develop the non-oil sector. The FG is proposing new taxes on petroleum products, telecoms and non-alcoholic beverages. While this boost government revenues, it poses significant threat on business growth.