…like the indicators on a car’s dashboard, these price signals speak to deeper underlying problems. To ďate, the concern of public policy has been too focused on freezing adverse price signals in the liquid nitrogen of rules and bureaucracy. But as this policy reversal one again points out, the emperor has no new clothes on. Men of goodwill have simply turned toads.
The Central Bank of Nigeria (CBN) advertises its most recent intervention in the domestic foreign exchange space as “necessary to deepen the foreign exchange market, provide more liquidity and create more transparency in the administration of diaspora remittances into Nigeria”. According to its recent amendments to the procedure for receiving diaspora remittances in the country, by permitting recipients of such remittances to cash out in foreign currencies, it is also helping “finance a future stream of investment opportunities for Nigerians in the diaspora, while also guaranteeing that recipients of remittances would receive a market-reflective exchange rate for their inflows”.
And in truth, by removing obstacles to transactions in the inward remittances market, the CBN might yet achieve these goals. When, a few years ago, the International Monetary Fund (IMF) first estimated the annual size of remittance inflow into the economy at about US$20 billion, most bank treasurers who I spoke to were sceptical. Extrapolating from the observed flow through international money transfer operators, nearly all guesstimated this at a wee bit more than US$2 billion annually. Most did concede, though, that the flow through informal channels were likely to be larger.
The market’s preference for hawala-type money transfers partially reflects the cumbrous nature of the formal financial services system. The innumerable forms that have to be filled and procedures often feel designed more to check the boxes in banks’ anti-money laundering/combating the financing of terrorism procedures than to ease customer access to their funds or improve the convenience of use of banks’ facilities. For the greater part, though, the naira’s fickleness, and banks’ inability to payout these remittances at anything but the official exchange rate drives the flow of remittances underground ― where the greenback fetches better rates.
It would take a while before banks’ domiciliary account balances grow in response to this new initiative. In the near-term, recipients will cash the dollars across bank counters, and head to the parallel market to convert these into naira. Not surprisingly, the announcement effect of the policy was enough to lop N20 off the naira’s dollar exchange rate.
By allowing recipients of remittance inflows to withdraw dollars ― even though they need to spend naira ― the CBN guarantees two things. First, more transparency in the workings of the inward remittances market. This is where it hopes that its new policy will “boost remittance inflows and foster an environment that would enable faster, cheaper, and more convenient flow of remittances back to Nigeria” ― according to the governor of the Central Bank. Second, improved supply of foreign exchange to the parallel market. It would take a while before banks’ domiciliary account balances grow in response to this new initiative. In the near-term, recipients will cash the dollars across bank counters, and head to the parallel market to convert these into naira. Not surprisingly, the announcement effect of the policy was enough to lop N20 off the naira’s dollar exchange rate.
“How effective will this policy be?” is a different question. The CBN estimates the inflow of remittances at US$24 billion yearly. This, however, was pre-COVID-19. With the dirty, dangerous and demeaning work which most immigrants used to do in the old normal being first in line for the sundry disruptions that have come in the wake of the pandemic, it is a fair bet that the liquidity that the CBN expects from this policy pivot will be muted. Then again, on the supposition that the economy was already receiving circa US$20 billion annually from its diaspora, this new policy creates no new sources of inflows. It simply routes the supply chain back into the formal financial services sector. It may, by forcing international money transfer operators to remit the dollars on these transactions into the country, boost supply marginally. But remember that a decision to ban payouts in foreign currency created the incentive for the non-repatriation of such funds in the first place.
…the biggest achievement of this policy is the CBN’s embrace of the market in search of a solution to its dwindling reserve problem. It proves how, properly-designed, policies may guarantee outcomes that are not positive for the economy. Dig deeper, and it also speaks to how poorly-thought out policies have continued to hurt the economy.
Still, the biggest achievement of this policy is the CBN’s embrace of the market in search of a solution to its dwindling reserve problem. It proves how, properly-designed, policies may guarantee outcomes that are not positive for the economy. Dig deeper, and it also speaks to how poorly-thought out policies have continued to hurt the economy. We have been down this road before. When the apex bank, in need of all the dollars it can get, opened this window for remittances, no sooner, though, than a recovery in oil prices had given the economy some head room, than the CBN shut the window down. Thus, we cannot do much harm by reminding ourselves that some six years ago, this “new initiative” was “standard procedure”.
Why was it reversed? And why walk back that earlier reversal now? Understandably, domestic economic indices – sovereign finances/debts, the naira’s exchange rate, headline inflation, the unemployment rate, etc. – have worsened on the back of such policy somersaults. We may not like the market. Its price swings do hurt the economy, especially the large numbers of Nigerians who are barely getting by. But like the indicators on a car’s dashboard, these price signals speak to deeper underlying problems. To ďate, the concern of public policy has been too focused on freezing adverse price signals in the liquid nitrogen of rules and bureaucracy. But as this policy reversal one again points out, the emperor has no new clothes on. Men of goodwill have simply turned toads.
Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.
