• Japa, FX rates convergence to push diaspora remittance to $26b
Naira could be facing a fresh crisis as official and black market arbitrage, which narrowed to near zero a week after the foreign exchange (FX) rates convergence, has widened in one week.
Last weekend, the premium on the parallel market rose to over N150 per dollar, the highest since June 14 when the Central Bank of Nigeria (CBN) announced the rates convergence.
Yesterday, the Investors’ and Exporters’ (I&E) window closed at N774.78/$ as against the black market trading band of N890/$. The spread narrowed to N115 per dollar or 15 per cent margin, but still much higher than the recommended five per cent.
A high spread is considered a sufficient incentive for market manipulation and round-trip transactions, which are rife in the country’s FX market.
But despite the odds against the new FX market management regime, the liberalisation policy alongside rising emigration of Nigerian young professionals is expected to push diaspora remittance flow into the country to $26 billion in 2025.
This, according to a pan-African credit rating agency, Agusto & Co, will be supported by improving economic conditions in advanced economies.
According to the agency, remittances from the diaspora have played an increasingly essential role in Nigeria’s economy, thereby serving as an important source of FX earnings and a catalyst for economic growth and development.
Nigeria received $20.1 billion in remittances in 2021, becoming the second-highest recipient in Africa, behind Egypt ($28.3 billion). Both countries received over half of all remittances to Africa.
While the rise in inflows to Egypt remained robust at 16 per cent, the growth in Nigeria slowed to three per cent.
According to the agency, the slow economic recovery and cost of living crises that confronted many developed economies in 2022 were indicative of the recent downtrend.
The agency said the negative trend was exacerbated by the implementation of capital controls and other unpopular policies by the CBN, which restricted inflows
The organisation also believes that the surge in emigration witnessed in 2022 is yet to translate to a commensurate rise in remittances as the majority of the emigrants are students, who will not fully join the labour force in their host countries until mid-2023.
The agency said but as more Nigerians are discouraged by the country’s gloomy economic conditions and look overseas for opportunity, their remittances will continue to play a crucial role in sustaining the country’s economy.
The agency noted that the growth of these funds has been exceptional and empowering dependents to meet their basic needs, pursue education, access healthcare and embark on entrepreneurial endeavours.
The agency further noted that, given Nigeria’s high poverty rate, which increases reliance on foreign aid, there is a need to finance the basic requirements of dependents to remain the most important element driving remittances in the near to medium term.
“In June 2023, the CBN liberalised the foreign exchange regime and did away with market segmentation, thereby collapsing all the segments into a single exchange rate window – Investors and Exporters (I & E) Window – and adopted a managed floating exchange rate regime.
We believe that the unification of exchange rates would also incentivise remittance inflows through official channels, particularly for investment purposes, as it is likely to improve the FX liquidity position, which would facilitate the repatriation of funds.
“Nigeria has been dealing with the challenge of emigration and brain drain for decades as a result of the rising number of people fleeing in search of greener pastures amid the country’s dim economic prospects.
“However, given the significant contribution of students to the emigrating population, Agusto & Co. expects a surge in remittance inflows in the medium term,” the agency stated.
