There has been some improvement in diaspora remittances since 2020, augmenting dollar liquidity in the Nigerian market.
Nigeria, Africa’s largest economy, has been hit with a forex crisis that has seen its currency, the naira, dwindled to N413/$1 in the official Import & Export (I&E) window and over N570/$1 in the parallel market. It has been a long battle for the Central Bank of Nigeria (CBN), pushing to tame the tide that has largely impacted economic growth of the country.
The naira has been repeatedly devalued as the CBN pushes to contain the impact of the accelerating FX crisis. Against this backdrop, economists have kept pointing at poor dollar liquidity as the root cause of the naira’s woes. However, the CBN, besides pointing accusing finger at the wrong places, including cryptocurrency operators and FX rates aggregator-platforms, has announced many policies aimed at saving the naira. A significant one among them is the ‘Naira 4 Dollar Scheme’, which offers recipients of diaspora remittances through CBN’s licensed International Money Transfer Operators (IMTOs), N5 for every $1 received as remittance inflow.
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Diaspora remittances have receded greatly since 2015, adding to Nigeria’s plummeted oil revenue compounding the issue of dollar liquidity. Data from the CBN shows $116 billion to be the total dollar inflow to Nigeria’s economy in 2020, which indicates 20% and 30% drop in dollar inflow when compared to 2019’s $142 billion and 2014’s $160 billion respectively.
However, the situation is improving. Recent data from the CBN shows that diaspora remittances rose by 5.1% quarter-on-quarter to $4.28 billion in the first quarter of 2021, from $4.07 billion in the fourth quarter of 2021.
There is optimism that the inflow will increase to more than $18 billion in 2022. The World Bank had, in its ‘Migration and Development Brief 35,’ projected 2.5% increase in Nigeria’s diaspora remittances in 2021. That would see dollar inflow to Nigeria move from $17.2 billion in 2020 to $17.6 billion in 2021. The current trend supports the belief that Nigeria will see more dollar liquidity from diaspora remittances in 2022, as the global economy keeps recovering from the pandemic.
However, amidst the optimism, concern over naira’s stability remains high as the increase in diaspora remittances has yielded little impact – the naira has kept falling. The latest naira devaluation (from N411/$1 to N413/$1) came into play early this year. The naira closed at N416.25/$1 in the official market, appreciating 4.3% from the previous week’s N435/$1. Inflation is currently at 15.40% – all indicating that the problem is far from over.
The central bank had late last year blamed Nigeria’s low dollar liquidity on petrol import. The apex bank said import of petroleum products gulps around 40% of Nigeria’s forex, notably depleting the country’s external reserve which is at $40.49 billion as of Jan 7.
The CBN also fingered excessive borrowing by the Federal Government from the CBN’s Means and Ways Advances window. The financial industry watchdog said it frustrates its monetary policies.
“Yes when the Federal government exceeds its revenue, the CBN finance government deficit through Ways and Means Advances subject (in some cases) to the limits set in the existing regulations, which are sometimes disregarded by the Federal Government.
“The direct consequences of the central bank’s financing of deficits are distortions or surges in the monetary base, leading to an adverse effect on domestic prices and exchange rates i.e macroeconomic instability because of excess liquidity that has been injected into the economy,” the CBN said, answering “Can the Federal Government frustrate the Central Bank of Nigeria from pursuing its monetary policy?” question on its FAQ page.
Despite the blames being thrown around by the CBN, the lasting solution to Nigeria’s forex crisis hinges mainly on, asides exporting enough non-oil products, the mammoth task of cutting the country’s petroleum products import, which will increase Nigeria’s dollar liquidity by more than 30%. But the hope to achieve this lies solely on Dangote Refinery, which is expected to launch in mid-2022.