World’s Outlier on Remittances Has Currency Woes to Blame
Nigerians living abroad could be sending more money home than authorities realize, bypassing official channels so their families can get more naira for their smuggled dollars on the black market.
Remittances to Africa’s biggest oil producer plunged by about 40% in the second quarter to the lowest level in at least a decade. That’s more than a drop of about 20% in Egypt and contrasts with improvements seen in Kenya, Sri Lanka, Pakistan, Bangladesh and Morocco, according to central bank data compiled by EFG Hermes.
Changing a greenback on Nigeria’s streets puts about a quarter more naira in the pockets of struggling Nigerian households than what they’ll get at the official rate. The central bank of Africa’s biggest economy uses multiple exchange rates and a raft of regulations to try and protect the local currency from further devaluations amid lower oil prices and a plunge in foreign investment.
“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. Currencies in countries including Kenya and Pakistan trade at about the same value in formal and informal markets, “so there is no reason to use backdoor channels.”
The sharp downturn in Nigerian remittances is in contrast with most other frontier and emerging-market countries that look poised to defy World Bank predictions for a 20% decline this year. Remittances may look better than they should because foreign workers are sending money back home as they lose their jobs and leave for good -- especially for countries that rely on Gulf Arab states for their income.
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While the cost of job losses might start mounting next year, the hit to remittances may be offset by improvements in tourism and export income, Robertson and a team of Renaissance Capital analysts said in a Nov. 17 report.
As the worst of lockdown restrictions that took hold between March and May lifted, more money has been sent home. Kenya reported a 9% improvement for the first 10 months of 2020 compared with a year earlier, while Pakistan has seen a 16% increase, according to the latest data from those central banks.
Nigeria’s massive shadow economy makes tracking inflows difficult, Robertson said.
Another contributing factor is the oil producer’s decision in August last year to shut its land borders to curb smuggling and boost local production, which chopped off a vital source of foreign-exchange supplies, Mohamed Abu Basha, the head of macroeconomic analysis at Cairo-based EFG, said by email. Inflows from the rest of the continent account for 25% of Nigerian remittances.
Nigeria’s economy contracted 3.6% in the third quarter from a year earlier after crude output dropped to the lowest since 2016. Central bank Governor Godwin Emefiele said earlier this week that the naira’s official rate shouldn’t be determined by the parallel market, where the currency has weakened to a three-month low.
The drop in remittances “will further weigh on Nigeria’s already weak growth outlook,” Abu Basha said. It would have “negative connotations for foreign-exchange liquidity and disposable incomes.”
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