THE Central Bank of Nigeria (CBN) governor has disclosed that weekly remittances into Nigeria have increased from 5 million dollars to 30 million dollars due to the bank’s new foreign exchange (FX) policy that allows recipients to withdraw proceeds in foreign currency. The movement from 5 million dollars to 30 million dollars represents 500 percent increase. 

Emefiele said on Friday at Vanguard/CBN/Bankers’ Committee Summit in Abuja that the new measure had increased the volume of transactions while reducing FX diversion by international money transfer operators (IMTOs) who had profited from dollar arbitrage arrangements.

CBN had, in November 2020, announced that it would allow diaspora remittances to be withdrawn in cash in a move to spur liquidity in the FX market and close the gap between the official FX rate and parallel/ black market rates.  The bank had, before then, foreclosed the possibility of withdrawing foreign remittances in dollars due to FX scarcity in the economy. But the move proved very costly for the economy as it led to acute dollar shortages, which hurt manufacturers and key economic players, plunging the economy into a deep slump.

However, the apex bank reversed the policy gear three months ago by allowing recipients to withdraw dollar remittances in cash.

Why remittances went north

Emefiele said in Lagos that the change of policy had led to increased remittances into the economy. The implication of this is that the former CBN policy drove Nigerians into diverting foreign remittances to informal channels; this, in simple terms, implies that people were diverting their remittances or receiving them via informal routes due to the former policy that barred them from getting dollars in cash. The former CBN’s policy made receiving FX in cash difficult. Still, it encouraged FX’s receipt in naira rather than dollars, pushing diaspora senders and receivers into routing their remittances via other means.

Manufacturers identify dollar scarcity, cost of funds as biggest business impediments

Many say the CBN’s former policy was inimical to the economy as it shortchanged several Nigerians and hurt their capacity to do business.

“I did a business with someone in the United States. The transaction was in dollars, but I could not withdraw in dollars. That shortchanged me in the end,” Eniola Akinsanya, a hairstylist in Lagos, told The ICIR.

Gregory Mankiw, a Harvard professor of economics, explained that the economy would always respond to incentives. “Incentive is something that causes a person to act. Because people use cost and benefit analysis, they also respond to incentives,” Mankiw said in his ’10 Principles of Economics.’

In the context of CBN remittances, Mankiw argues that foreign inflows through official channels will rise when policies allow recipients to receive money in dollars. With naira becoming weaker, many senders would not wire dollars or pounds through official routes in order to not shortchange recipients as long as the former CBN policy subsisted.  However, with a policy change, senders now feel at home to send money via official means.

“Behaviour changes when costs or benefits change,” Tom Spencer, an economist, said.

READ ALSO: CBN’s diaspora remittance policy and how Nigerians are reacting

The Lagos Chamber of Commerce and Industry (LCCI) said the policy had proved to be a step in the right direction.

“It is a step in the right direction in resolving the liquidity issue in the currency market by ensuring the availability of foreign exchange, especially at the retail segment,” Toki Mabogunje, president of the chamber, said.

“This should be replicated for other sources of inflows such as export proceeds, Foreign Direct Investment [FDIs], and Foreign Portfolio
Investments [FPIs]. Robust remittance inflow is expected to moderate FX pressure and narrow the wide parallel market premium
as economic agents have access to a harmonized rate. A unified FX framework is necessary to boost investor confidence.”

Nigeria is facing FX scarcity arising from low oil prices and the demand for Brent. Africa’s most populous country is dollar-dependent, and fluctuations in the crude oil market since late 2014 have derailed FX inflows, leading to the economic slump. The economic growth has averaged o.28 percent in the last four years.