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CBN’s “Naira4Dollar” scheme wants to bring back foreign remittances

In a battle for the control of foreign remittances, the CBN’s Naira4Dollar policy is incentivizing users to receive money through banks by giving them ₦5 for every $1.

In the last few years, the Central Bank of Nigeria (CBN) has been in a war to keep the exchange value of the naira stable against the dollar. Between 2015 and 2016, this task was easy because oil prices were stable and it pegged the official rate at $1 to N360.

But a lot has changed since then with record low oil prices, two recessions and at least three stealthy devaluations of the Naira. The reality is that rising demand for the dollar is putting pressure on the Naira but the CBN remains opposed to the markets determining the FX rates.

Instead of a float or allowing the market to do its thing, the CBN first decided that for certain items, importers would not be able to get access to FX. This only widened the gap in Nigeria’s multiple FX windows; while the CBN insists that $1 = ₦410, the markets say $1 = ₦482.

Everything the CBN threw at the problem failed; so last year, it changed its strategy to a focus on using remittances to solve its liquidity problem. 

The thinking behind the change of strategy is simple: Nigeria can meet its FX supply by focusing on payments Nigerians abroad send back home through international money transfer agents. 

Solving an FX problem with remittances 

According to a report from 2017 [PDF], Nigeria accounts for over a third of migrant remittance flows to Sub-Saharan Africa. In 2018, those flows amounted to $23.63 billion which is an estimated 6.1% of Nigeria’s Gross Domestic Product (GDP).

The CBN’s thinking is that these inflows, which are 11 times larger than the country’s Foreign Direct Investment (FDI), can solve the FX liquidity issue. But there’s a problem; a big part of these inflows do not come into Nigeria through official channels like banks or Money Transfer Agencies (MTAs).

Source: Central Bank of Nigeria 

Most people who bypass the banks or MTAs like Western Union and MoneyGram do so because the transaction costs are high. Instead, people opt to use different channels that offer low transaction fees and pay remittances in Naira. 

In December 2020, the CBN acknowledged this and had this to say, “These unscrupulous operators, who lure unsuspecting customers with ridiculous exchange rates, use Naira accounts opened in local banks ostensibly for legal business to pay out the proceeds to the beneficiaries while channelling the foreign currencies to fund the parallel market.”

These channels with low transaction costs pose a challenge to the CBN which wants FX to move onshore only through official channels. The apex bank’s response has been to block these International Money Transfer Operators (IMTOs). 

Blocking IMTOs and Naira4Dollar Promo 

In a circular released in November 2020, the CBN said “beneficiaries of diaspora remittances through International Money Transfer Operators (IMTOs) shall receive such inflows in foreign currency (US Dollars) through designated banks of their choice.”

One month later, the CBN took a bigger step by suspending Mobile Money Operators and Payment Switch Providers from receiving remittances or integrating their systems with International Money Transfer Operators (IMTOs).

But it is not enough to force these channels underground, the CBN is now introducing a policy to offset the transaction costs for people sending money through formal channels. 

In what it calls the “CBN Naira 4 Dollar Scheme”, the regulator will reward anyone who remits dollars via banks with ₦5 for every $1 remitted.

One banker who spoke to TechCabal off the record said, “At the meeting, the CBN casually mentioned ₦2 at first and also ₦3 secondly and eventually settled for ₦5 and that’s why if you observe, some banks released varied communications of the amount.”

Omotola Abimbola, a macro strategist focused on Sub-Saharan Africa, told TechCabal that “the new policy was done to provide additional incentive to use IMTOs and offset the transaction cost.” 

It feels like a short-term solution but Abimbola says that Bangladesh used a similar policy and has reported an increase in remittances. 

“CBN is trying to promote remittance via formal channels (mainly approved IMTOs) where proceeds now move onshore, compared to Peer to Peer networks and crypto payments where the USD liquidity typically stays offshore.”

Despite how straightforward the thinking appears, there are questions such as, who pays the 5 Naira;  the Federal Government or the CBN? 

Yet, the biggest question overall is this, if this move is to improve dollar liquidity generally from remittances, isn’t it easier to liberalize the entire remittance process? 

For Abimbola, liberalization is the long-term solution but he adds that “this Naira4Dollar policy may still have a place in a liberalized FX market to encourage flows through official sources.”

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