Naira4Dollar scheme may have boosted foreign exchange inflow

When the cash-cow dies

By Emeka Anaeto, Business Editor

There are indications that the Central Bank of Nigeria's Naira4Dollar scheme may have gained traction as authorized dealers hinted of significant increase in volume of foreign exchange inflows by diaspora remittances through the banks.

Specifically, they put weekly average inflow at USD50 million, up from about USD 20 million in the corresponding season of last year.

Though still a pilot scheme, at USD50 million a week the CBN could be attracting about USD2.6 billion per annum. This will be a quantum leap from the estimated USD1.1 billion received in 2020 from diaspora remittances, though much lower than the $3.2 billion received in 2019.

According to the CBN, the scheme is "an effort to sustain the encouraging increase in inflows of diaspora remittances into the country",

The Central Bank of Nigeria (CBN), in a bid to manage the exchange rate and improve liquidity in the foreign exchange market, has been introducing forex policies that it expects will curtain demand and improve forex liquidity. The 'Naira for Dollar' scheme is the latest policy introduced by the CBN to promote diaspora remittances.

The scheme offers recipients of dollar remittances through CBN's International Money Transfer Organizations (IMTOs) N5 for every $1 received as remittance inflow.

Despite the return to growth, albeit tepid, a dark cloud of uncertainty continues to hover over the minds of millions of Nigerians as the broader economy remains in a fragile state. A key factor that remains a bellwether for the economy is the exchange rate, which is always perfectly correlated with the price of oil and the resultant dollar related export earnings.

Economy analysts have expressed the view that the scheme which is scheduled to run between March and June 2021 should be consolidated into an encompassing foreign exchange reform geared towards diversifying foreign exchange earnings of the country away from the oil export.

If this is properly implemented the Central Bank of Nigeria, CBN, according to the analysts, would have freed itself from the burden of providing liquidity to the foreign exchange market.

At the backdrop of this scheme, the CBN believes remittances paid in dollars and sold on the streets will improve liquidity in the retail end, thus strengthening the exchange rate.

Already the commercial banks are enjoying floats and liquidity in their domiciliary accounts as they now automatically open domiciliary bank accounts for beneficiaries of diaspora remittances in Nigeria under the CBN's Naira4Dollar scheme.

Commercial banks do not need the permission of the recipients to open a domiciliary account, a huge departure from the CBN's strict policy documentation requirement for opening domiciliary accounts.

Apart from dependents expecting money from loved ones abroad, Small Business owners operating in Nigeria can now receive funds from clients without the need to provide a domiciliary account numbers in the first instance. All they need to do is provide their naira bank account number and then their bank automatically opens a domiciliary account number once a remittance inflow is received.

Dealers said if this initiative is sustained, it could create a massive platform for the retail market to receive or earn a significant amount of forex abroad without the need to own a PayPal account or any other competing account.

CBN governor, Godwin Emefiele, explaining the rationale behind the scheme, had stated: ''Consistent with the global trend, Nigeria aspires to ensure that remittance flows and diaspora investments become a significant source of external financing.

''We believe this new measure will help to make the process of sending remittances through formal bank channels cheaper and more convenient for Nigerians in the diaspora.

''New FX policy will create an easier, more flexible, and more transparent, system of remittance administration, it will greatly enhance the benefits of diaspora remittances in supporting investments and growth in Nigeria.

''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.

''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.

''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.''

Analysts' views on Emefiele's positions appear supportive. They opine that with the new arrangement sending remittances through Nigerian banks would end up being cheaper and more convenient. In reality, the scheme appear to be targeting other channels of remitting money to Nigerians. For example, rather than pay excess transfer charges, you transfer the money through a Nigerian bank and then get an extra N5 for each dollar. However, according to the analysts, they will have to contend with thousands of Nigerians who simply embark on peer-to-peer exchanges. Nigerians who live in the US or Canada often prefer to sell the dollars to Nigerian living in Nigeria but who need dollars abroad.

But basically, the CBN's scheme is all about competing for remittances. The apex bank wants you to route through the bank rather than the black market.

For the purposes of planning and data integrity, the transparency in the diaspora remittance through this scheme is basically allowing the CBN to track dollar inflows from Diaspora Nigerians and see which sectors it is flowing into.

This scheme have been applied successfully in Bangladesh and some other Asian economies and the CBN appears to have modeled this new scheme on similar policies in Asian countries.

CBN's data indicate remittance figures from the balance of payment report have fallen drastically in 2020 compared to the same period in 2019. In the first nine months of 2019 total workers remittances are reported as $17.5 billion compared to $12.8 billion in the corresponding period in 2020.

This represents a 26.8% drop further confirming the impact on the reliability of diaspora remittances for the country.

The statistics above perhaps explains why the central bank is keen on driving up remittances even if it means paying a premium for it.

The CBN is hinging on the relationship between incentives and the laws of demand and supply hoping this will drive liquidity at the retail end of the black market.

Challenges

However, despite the CBN's intention to attract more forex into the country through the policy, some experts have raised concerns about the policy's implementation. They say that the policy is yet to address the issue of monopoly in international money transfer and cost to the sender of the funds. They also believe certain aspects that could make it work have not been adequately addressed.

Chairman of  the Association of Bureau De Change Operators in Nigeria, Aminu Gwadebe, said, "On the naira for dollar policy, though a step in the right direction, it's not totally comprehensive to address the constraints in the remittance space in the economy. The major challenge of the policy is the fixed exchange rate versus the parallel market rate in the market. Also, the involvement of high-level institutions like banks with heavy infrastructural costs makes it usually very costly.

''Thirdly, factors like the prevalence of unregulated channels is a major setback to most policy initiatives.

"This new measure will help to make the process of sending remittances through formal bank channels cheaper and more convenient for Nigerians in the diaspora, hoping this will help boost liquidity in the retail end of the forex market.''

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