By Chuks Emele
The naira clawed back 6 percent within three days, after touching the precipice of 500 per dollar, as the central bank relaxed rules governing diaspora remittances.
It was exchanging at 470 naira to a dollar by Thursday afternoon, on the heels of a flurry of circulars from the regulator, making it clear that beneficiaries of international money transfers can receive payment in hard currencies.
Before then, people who received international money transfers using the likes of Western Union, Money Gram and Remita, had to receive their payment in the local currency at the lowest of the multiple exchange-rate system run by the central bank.
As the divergence between the interbank exchange rates and the parallel exceeded 20 percent in recent months, it became clear that remittances through the official channels were falling. It declined by 40 percent in the first half of this year, reversing its trend of growth over the previous three years.
“I stopped using Western Union to send money home because of the low rates,” Ade Babalola, a Nigerian doctor based in the U.S.told Nairaweb.ng. “Instead I found ways to send cash, so that they can change it in the parallel market and get the most naira.”
Babalola was apparently not alone, as it increasingly became obvious to financial regulators why official diaspora remittances were drying up. The CBN circulars making it clear that money transfer beneficiaries should have “unfettered access” to their dollars were meant to reverse that trend. The quick retreat from the 500 naira per dollar exchange rate amply demonstrated that it worked.
More Nigerian recipients will now have more dollar cash to take into the parallel market to ease the demand pressure that had put the naira on the back foot.
What is more is that it’s been clearly established how much the Nigerian economy relies on inflows from the diaspora at a time of dwindling revenue from crude oil, its primary export. A lot is certainly the answer.
Diaspora funds have become a pillar of President Muhammadu Buhari’s economic recovery efforts, with Central Bank of Nigeria Governor Godwin Emefiele telling reporters on Thursday that the country is moving to get all remittances coming through official channels. An analysis of recent rremittance data, he said, showed that money transfer operators were paying recipients low rates and taking the foreign currency into the parallel market where they arbitraged higher exchange rates, further sabotaging the naira.
It didn’t only result “in a significant drop in flows into the country. It also encouraged the use of unsafe unofficial channels, which also supported diversion of remittance flows meant for Nigeria,” he said.
With the new measures put in place, the central bank expects improved inflow of diaspora funds through official sources, with a positive knock-on impact, not just on the exchange rate, but on the rest of the economy as well.
“If Nigeria is able to receive even if it is just 1 billion dollars monthly or moving close to $2 billion monthly, I’m so certain you all know what will happen to the exchange rate,” he said. These funds “could help in improving our balance of payment position, reduce our dependence on external borrowing and mitigate the impact of COVID-19 on foreign exchange inflows into the country.”
Official remittances of about 25 billion dollars sent back home by the diaspora in 2018, was about the value of the country’s entire budget for that year.
As Patrick Ani, a former Nigerian finance minister under late dictator General Sani Abacha noted, the country survived a period of economic sanctions, low oil sales and foreign reserves between 1993 and 1998 by relying on diaspora remittances.
That was when Western Union and Money Gram began operations in Nigeria, and the key provision that made the difference was allowing beneficiaries to receive payment in foreign currency, according to Ani.
Over the years this policy was changed, and banks were required to pay the recipients the naira equivalent. It was a policy critics said left the bulk of the foreign currencies in the banks’ holdings abroad, without affording the economy the full benefits of those inflows.
The decision of the CBN to bring back this flexibility has proved immediately efficacious, raising the question: for whose benefit was it sidelined in the first place? The banks?
That may be a question for symposium discussion. What has been established without doubt is that the economy isn’t really underpinned by crude oil but by the earning capacity of Nigerians, who fled an environment made hopeless for them by misrule. It’s an irony they’re having to bail out the country from the effects of the same serial misrule.