Boosting Remittances with Central Bank of Nigeria (CBN) ‘Naira-for-Dollar’ Policy
Central Bank of Nigeria (CBN) ‘Naira-for-Dollar’ Policy took effect on Monday, March 8, 2021. This Policy will allow all recipients of diaspora remittances through CBN-licensed International Money Transfer Operators (IMTOs) get paid N5 for every $1 received as remittance inflow.
The intention of the Policy as stated by CBN is to make remittance transfer cheaper for Nigerians in the diaspora.
It will also encourage banks and financial institutions to develop products and investment vehicles geared toward attracting investments from Nigerians in the diaspora.
The benefits of this Policy and what it intends to achieve are captured in the words of the Governor of CBN, Mr. Godwin Emefiele who stated that CBN in its effort ‘strives to constantly improve our remittance infrastructure, ease the process of international money transfer and simplify the experience for senders and recipients.’
He acknowledged the effect of remittances on Nigeria economy, “As we are all aware, remittances from Nigerians living abroad has had significant benefit on domestic income, social welfare and economic growth in Nigeria.”
The Governor stated that the Policy is targeted at “ensuring that remittance flows and diaspora investments become a significant source of external financing” and “making the process of sending remittance through formal bank channels cheaper and more convenient for Nigerians in the diaspora.”
There are favourable arguments to support the need to attract annual transfers of money by foreign migrant workers to their home countries. These are in tune with CBN line of thought.
Evidence abounds on how these remittances had provided income support and provided funding for start-ups for family members back home.
It is believed that remittances are a source of foreign exchange reserves for developing countries. Examples of countries that optimized remittances as a source of foreign exchange reserves are India, China, Mexico, the Philippines and Egypt.
In such countries remittances had helped contain trade balances and widen the revenue base through increased consumption.
Introduction of this Policy might have been necessitated by the recent slump of the net current transfers in the balance of payments (BoP). The slump is said to be by -27.1 per cent year-on-year.
Net workers’ remittances which make up 90 per cent of net transfers slumped by -33.0 per cent year-on-year.
It is also possible that CBN having seen the success of this Policy in Pakistan and Bangladesh decided to give it a trial.
There was a robust growth in remittances in these countries where their Central Banks pay out a small bonus on conversion into local currency.
Bangladesh introduced the Policy in June 2019 far ahead World Bank prediction of 20 per cent decline in remittances for 2020.
Bangladesh gives a 2 percent rebate on remittance inflows. This has led to a 20 percent boost in remittance inflows.
In Pakistan the Policy is called ‘free send’ and the Policy has enabled the country to receive over $2 billion a month as remittances even during the COVID pandemic.
It is not contestable that cost is a factor in remittance inflow though not the only factor.
In the words of Emefiele “the average cost of sending $200 worth of remittance to Nigeria from the US was about 4.7 per cent; studies have shown that even a one per cent decrease in the cost of sending remittance can result in a significant boost in inflow.”
It is expected that CBN breaks this N5 for a Dollar down either in terms of percentage or Dollar saved.
Going by the average cost of 4.7 per cent per $200 given by CBN Governor the cost of remitting $200 is $9.40. It means the actual amount received by recipient is $190.60.
The rebate of N5 for a Dollar reduces the cost to 4.62 per cent. The recipient received effectively $190.76 on every $200 remitted to him. He reduces the cost on $200 received by $0.16 as a result of the rebate.
This is less than 2 per cent. The question is, how enticing is this to boost remittance inflow? To what extent does it follow CBN Policy of making remittance transfer cheaper for Nigerians in the diaspora?
Bangladesh boosted its remittances inflow with 2 per cent rebate. Why did CBN think that less than 2 per cent of N5 for a Dollar would do the magic in Nigeria?
Whilst the Policy can be seen to be good the rebate might be too low to achieve its target.
Moreover there are other factors that influence remittance inflow which are exogenous to CBN functions and capacity.
The situation of the economies of the countries where Nigerians reside will be a factor.
It will be difficult to convince Nigerians abroad to remit money home for investment in a situation of insecurity. They are more current with affairs in Nigeria than Nigerians in Nigeria. Some of them have no intention of coming back to Nigeria. They are scared.
The welfare theory had broken down as a result ofa breakdown in social bonding and trust.
Let us see how banks and financial institutions will develop products and investment vehicles geared toward attracting investments from Nigerians in the diaspora as it is believed that this will boost remittances inflow.
Nigeria should go ahead and copy whatever we could still copy from Kenya, Bangladesh and Pakistan to boost remittances inflow but importantly let the problem of insecurity be solved.