Remittances are considered to be highly important, especially to developing nations as they make-up a non-negligible percentage of their Gross Domestic Product (GDP). Hence, it cannot be overlooked.
Beyond its significance to a country’s GDP, it also helps to improve the balance of payment (BOP) position. BOP is a measure of the inflow (import) and the outflow (export) in a country and is a key indicator used in determining a country’s foreign exchange (FX) position.
A country whose value of its exports supersedes that of its imports produces a positive balance of payment and vice versa.
Since Africa’s biggest economy, Nigeria is majorly an import-dependent nation, remittances then appear to be key in filling up the foreign exchange gaps it has. Hence, Nigeria partly relies on dollar inflows via remittances as it gives it more FX to improve its balance of payment position.
Remittances in Nigeria is the second top-most FX earner, only next to oil. Nigeria generates even more FX from remittances than foreign direct investment (FDI) inflows into the country.
For Nigerians in the diaspora, the objective for sending money home isn’t exactly about its impact on the GDP of their home country and the economy. Rather, to them, remittances are a way to provide support to their families back home and lessen the effect of the economic downturn,
Here’s the main gist: In the early days of November 2020, the World Bank projected that the diaspora remittance to Nigeria is expected to drop by USD 2 Bn to USD 21.7 Bn in 2020, from USD 23.8 Bn in 2019.
In its report, as expected, the World Bank connected the decline in remittances from the diaspora to the pandemic and the general economic malaise it has ushered in.
However, this might not be the case, as a certain hypothesis see Nigerians in diaspora taking a different route in sending money to their loved ones to take advantage of the local currency issues back home.
And what route could this be?
The tale of the Nigerian diaspora remittance
The Q2 data from the Central Bank of Nigeria (CBN) showed Nigeria to have recorded the lowest remittances since 2008 and this was linked to the effect of the pandemic. It was held that COVID-19 reportedly affected the income levels of Nigerians in the diaspora.
The data stated that remittances in Q2 2020 fell to USD 3.3 Bn which is way lower than the normal average amount of USD 5.8 Bn remittance per quarter.
Meanwhile, there exists a certain hypothesis that Nigerians living in the diaspora could in the real sense be sending more money home than authorities realize, by smuggling dollars through the black market.
To get a full glimpse of the drop in remittances, let’s consider this scenario: a situation where there are two choices available to be made by a Nigerian in the diaspora.
The first choice is to send money at the official exchange rate of NGN 380.00 to the dollar. And the second choice offers up to NGN 480.00 to the dollar. Which choice would likely gather more interest? The second one, obviously.
This is because, the latter gives the recipient a chance of getting more naira value, with the same dollar amount. Thus, it means more money in naira for their loved ones back home.
The second scenario summarizes the case with remittances and exchange rate in Nigeria, as there are some people in the diaspora reportedly taking a back-door route in sending money to their loved ones.
The parallel market in Nigeria happens to be a very spatial and fast-growing one, mainly hinged to the sparing availability of FX, and is a huge concern even for the Nigerian government.
A statement from the Chief Global Economist of Renaissance Capital via Bloomberg reads: “When you have such divergent foreign-exchange rates, many expats will find ways to get money into Nigeria at the best possible rate,” Renaissance Capital’s Chief Global Economist, Charlie Robertson, said in an email.
In most other African countries, unlike Nigeria, currencies trade at about the same value both in the formal and the parallel market.
This then explains that, beyond the already obvious reason for the sharp drop in remittances which is due to the pandemic, the backdoor approach could also be another reason for the dip.
Nigeria’s weak currency can be blamed for this occurrence, as it has led to a huge disparity between the official price for FX and the black market price.
And to think that the cost of sending money to Sub-Saharan Africa countries, in general, is much higher than the global average. On average, sending USD 200.00 to Sub-Saharan Africa costs about 8.5 percent, compared to the global average at 6.8 percent.
Hence, it’s not over the top that people living in diaspora appear to go through other means which could supply more funds to the recipient.
In entirety, this reported drop in remittances is likely to further negatively impact Nigeria’s already weak growth outlook.
Featured Image Courtesy: Umaizi