Bismarck Rewane, Chief Operating Officer (COO) of Financial Derivatives Company (FDC) Limited said, a potential risk to the Naira4dollar policy is that there will be attempts to roundtrip and arbitrage the system.
Instead, he said, more than anything else, efforts should be geared towards boosting foreign exchange (forex) inflows by scaling up non-oil exports.
“This requires sector specific policy initiatives to attract investors and develop the non-oil sector”, he said.
In a recent report by FDC, he appears not happy that the Federal Government (FG) is proposing new taxes on petroleum products, telecoms and non- alcoholic beverages, because, while it will boost government revenues, it poses a significant threat on business growth.
He added that the current pandemic and furloughs could cut deep into the inflows. This is because foreign remittance is largely dependent on the economic conditions in the global economy, particularly the originating countries. According to PWC, the bulk of Nigeria’s remittances flow came from the US, UK, Cameroon, Italy, Ghana, Spain, Germany, Benin Republic, Ireland and Canada in 2017. The good news is that all these countries are expected to recover from the COVID- induced recession in 2021 with an average growth rate of 4.3 per cent.
In a bid to sustain the increase in Diaspora remittances into the country, the Central Bank of Nigeria (CBN) has introduced a ‘Naira-4-Dollar’ promo. The promo, which takes effect from March 8, 2021 and ends on May 8, 2021, offers recipients of Diaspora remittances N5 for every $1 re- ceived as remittance inflow through licensed International Money Transfer Operators (IMTOs). Like Bangladesh and Pakistan, the CBN designed this promo to increase awareness and diaspora remittances inflows into the country through the IMTOs.
According to the Apex bank it should reduce the cost of remittances from the current cut-throat rates.
In nominal terms, the exchange rate is unchanged but in reality it is an effective 1pne per cent depreciation of the currency. The IEFX rate has fallen four per cent Year-to-Date (YTD) to N411/$.
This initiative is expected to increase Diaspora remittances flow into the country, boosting forex supply. This will also stem the depletion in the gross external reserves level (currently at $34.88 billion as at March 4).
Nigeria was the 7th largest recipient of remittances in 2018 behind India, China, Mexico, Philippines, France and Egypt. However, the World Bank projected a $2 billion drop in Diaspora remittances into Nigeria to $21.7 billion in 2020 from $23.8 billion in 2019, due to the impact of the COVID-19 pandemic and the attendant economic crisis.
As forex supply increases, we expect demand pressures to ease with a possible naira appreciation especially at the parallel market. Year-to-date, the naira has lost 2.55 per cent at the parallel market (currently trading at N482/$). More importantly, the new policy is likely to reduce the premium between the parallel market and the IEFX rates (currently at N71). It will also reduce the cost burden of remitting funds to Nigeria by Nigerians in the Diaspora.
