Covid-19 pressure holds Nigeria remittance inflows by jugular

• Remittances remain significantly below 10-year historical average of $5.3bn 
• Experts anticipate CBN sustains policy stance in 2021 to attract portfolio inflows

Charles Abuede

 It is no longer news that the negative impact of the global health crisis has given several economies no further options on what routes to follow in the drive toward economic sustainability, as well as perking up their exports and managing imports, in order to improve the rate of remittances inflow and shore up their balance of payments. 

Early on, as the coronavirus crisis took hold, the World Bank forecast a 20 per cent annual fall in remittances to emerging markets such as Nigeria and frontier states. However, what has become the outturn has clearly been worse than initially expected in the largest economy in Africa. Remittances remain significantly below 10-year historical average of $5.3 billion due to the continued disruptions from COVID-19 in economic regions with huge Nigerian diaspora flows such as Europe and America.

In a recent development, the Central Bank of Nigeria (CBN) has, in a move to improve FX liquidity, directed banks to pay remittance recipients of International Money Transfer Operators (IMTO) funds in foreign currency. Positively, this directive helped to improve the supply of dollars to the parallel market and also reduced the pressure on the naira. However, the World Bank in its 2020 forecast expects remittances into the country to take a rain check relative to 2020 levels, and to be driven mainly by weak economic growth and lower employment levels in migrant-host countries along with depreciation of the currencies of remittance-source countries against the US dollars.

Through a recent quarterly statistical bulletin obtained from the Central Bank of Nigeria Business A.M. now understands that there was a -27.1 per cent year on year slump to $4.35 billion in net current transfers in the balance of payments during the third quarter of 2020; and yet this rose by 11.6 per cent quarter on quarter in the same review period. Also, there was a -33 per cent year on year decline and 14.8 per cent quarter on quarter rise in the total workers’ remittances which account for about ninety per cent of the net transfers in the balance of payments (BoP).

A critical point to note, according to economic experts, is that the quarter on quarter improvement in the net transfers as seen from the CBN data vault, is probably as a result of the low point in the COVID-19 cycle for those countries where Nigerian diaspora is of high concentration. On the other hand, it is a possibility that the Nigerian diaspora has a particularly large presence in those economies with the largest hits of the pandemic such as the eurozone and UK; while another factor may have been the exchange rate regime which shows that recipients of remittances were not getting the full value of their transfer in the local currency.

On a comparative lens, the remittance inflow figure was about 9 per cent ahead of the 2019 figures in Kenya between January and October while there has been robust growth in remittances in Pakistan and most of all, Bangladesh where the country’s apex bank pays out a small bonus on conversions into the country’s local currency.

Meanwhile, the year on year decline in net transfers, taken alongside the resilience of merchandise imports, compensate more for the much-reduced outflow on services. However, experts have pointed out that this decline explains why Nigeria’s current account still remains in the deficit region as it would have been the first surplus to be recorded since the second quarter of 2018. By the declines in the foreign inflows into the economy, the external reserves have also witnessed a steep depletion by 8.2 per cent from $38.5 billion prior to the covid-19 era (first trading day in 2020) to $35.4 billion on the last trading day in 2020. Thus, the country’s net transfers were once more and substantially higher than the net inflows of foreign portfolio investment (FPI), which stands in the tune of $1.67 billion, let alone those of foreign direct investment (FDI) of $470 million.

As a result, analysts have asserted that higher International Money Transfer Operators (IMTO) flows are probably a relatively higher price of oil in the global market as well as the payout of already approved loans from international lenders and planned borrowings from external sources are positives for strong external reserves to cater to the consequent demand in the market.

Consequently, the CBN’s exchange rate policy preference is, as always, influenced by the global prices of oil, total capital inflows and the position of the country’s reserves. As a result, in the face of falling oil prices, dwindling capital inflows and miserable external reserves, the CBN’s cravings for a fairly stable currency poses a challenge. Accordingly, it adjusted its exchange rate two times in 2020 with the last adjustment bringing the exchange rate to N379 per dollar, which represents 24 per cent depreciation from the N360 official rate. Interestingly, the CBN governor, in a recent virtual conference held in February 2021 in Lagos, said that its regulatory changes, which were announced in December 2020 and, notably, the new option for beneficiaries to take their incoming payments from licensed international money transfer operators in the foreign exchange market have given a boost to remittances.

While the reversal of the CBN’s policy on diaspora remittances in December 2020 may encourage a marginal increase in inflows into the economy, economic experts expect remittances to remain weak as Nigerians abroad continue to adjust to the post-COVID environment, implying a bleak outlook for the Nigerian naira. 

In the same vein, experts have expressed that they expect a further devaluation to levels closer to the general consensus of the true value of the naira, which is expected to trigger increased foreign portfolio flows into the country.  

In the meantime, it is expected by analysts that the CBN sustains its policy stance in 2021; which is anticipated to be driven largely by the need to improve credit flow to spur economic growth and consequently in a move to attract portfolio inflows and reduce consistent exit of investors in the economy. Also, recovery in remittances is anticipated as some of these economies where Nigerians in the diaspora are resident begin to rebound to their pre-covid-19 levels.