Naira4Dollar Scheme… Beneath CBN’s quick-fix measure to solve endemic FX crisis

THE Central Bank of Nigeria (CBN) may have chosen quick fixes to address the perennial commodity-related crisis facing the Naira as supposed to the widely-commended exchange rate convergence programme mooted last year. But whether its new choices, seen in some quarters as cosmetic, would address the historic crisis is subject of debate.

 At the weekend, the apex bank extended the campaign to boost remittances when it introduced what it termed the ‘CBN Naira 4 Dollar Scheme.”

 In a circular addressed to banks, the international money transfer operators (IMTOs) and the public, the regulator unveiled a new scheme tagged ‘CBN Naira 4 Dollar Scheme’ akin to the traditional end of the year sales promo. 

The promo, which intends to increase diaspora remittances, will see remittance recipients receive an extra N5 for every dollar transferred to them. This is intended to make the official window compete better with the black market options which have enjoyed robust patronage in previous years for their cheap costs.  

The memo dated March 5, 2021, but released yesterday, read: “In an effort to sustain the encouraging increase in inflows of diaspora remittances into the country, CBN hereby announces the introduction of the ‘CBN Naira 4 Dollar Scheme’, an incentive for senders and recipients of international money transfers.

“Accordingly, all recipients of diaspora remittances through CBN licensed IMTOs shall henceforth be paid N5 for every USD1 received as remittance inflow.

 “In light of this, the CBN shall, through commercial banks, pay to remittance recipients the incentive of N5 for every USD1 remitted by the sender and collected by the designated beneficiary. This incentive is to be paid to recipients whether they choose to collect the USD as cash across the counter in a bank or transfer the same into their domiciliary account. In effect, a typical recipient of diaspora remittances will, at the point of collection, receive not only the USD sent from abroad but also the additional N5 per USD received.” 

The new gambit is perhaps the bizarre option, as Godwin Owoh, a professor of applied economists described it, of the CBN’s gambit to shore up remittances since December. In a series of circulars and engagements last year, the CBN repealed existing operational guidelines of remittances and domiciliary accounts operation, ceding the power to choose how to be paid to recipients. The CBN had lashed at the IMTOs for milking and exploiting the arbitrage while doing nothing to deepen the market.

As attractive as the incentive sounds, economists have balked at its ability to turn the tide as the black market routes hold sway. 

The United Nations Sustainable Development Goals (SDGs) targets to reduce the cost of remittances, which the World Bank admits are crucial for addressing global poverty and mitigating the impacts of Covid-19, to three per cent by 2030. 

 Sub-Saharan Africa, including Nigeria, is the region mostly to send transfer money to worldwide. In Q3 2020, the average cost of sending $200 to Africa was estimated at 8.5 per cent as against the global average of 6.8 per cent. The uncompetitive costs of official service give it out as unaffordable means of sending money home by many Nigerians.

The high cost of remittance is but a tiny part of the many causes of unattractive official money transfer. A major challenge has been the huge differential between the official Nigerian Autonomous Foreign Exchange (NAFEX) and the black market, which is currently about N80 and hits N100 sometimes. Before December, the arbitrage was the albatross of the official IMTOs window, with only a few people without option embracing. But with recipients now paid in dollar, the problem is solved, albeit partly.

 As the IMTO and their agent banks were shut out of the largesse in the arbitrage, they innovated new tricks. They are consistently out of liquidity, forcing desperate recipients to accept the naira equivalent often. And when they have dollar, there is a resurgence in the racketeering in small bills, which trade lower at the market.

These tricks coupled with the exploitative service charges make the unofficial mediums the undeniable choices of most Nigerians abroad. Besides, Naija Times was informed that the undocumented option the undeniable choice of many.  

 Today, a matching practice, which enables Nigerians back home and those abroad to get fair market value for their money without paying any charge is gaining acceptance through a currency barter system. Currency traders said the trend is a major challenge to growing the official transfer market.  

The Central Bank is racing against time to reverse the tide against the naira. Last year, the total capital importation tumbled by 60 per cent, falling from $24 billion received in 2019 to $9.7 billion. 

Experts have warned that except the divergent exchange rates are harmonised, Nigeria will continue to remain uncompetitive in the global investment market as a huge differential between the official and parallel market rate remains very high at about N80 per dollar (about 20 per cent).

The apex bank has continued to fund the NAFEX, which is expected to lead the promised forex liberalisation, restricting its tendency to close up the wide gap between the window and the parallel market, where naira currently trades at N480/$.

Each attempt to break the N400/$ psychological level at NAFEX has been artificially muted, forcing the true value of the dollar to retreat to a false price. 

On December 31, 2020, the dollar gained value with the rate jumping to $410/$. Experts hailed the movement as a possible inclination towards convergence. But in the turn of January, the apex bank intervened forcing the dollar to retrieve. 

Since then, the Bank has intervened in the NAFEX window on several occasions to weaken a resurging dollar.   

 Market operators said the CBN needs to pull the plug on the market to allow the forces of demand and supply to have their ways to begin to have official rate foreign investors will consider as a fair deal.

 The parallel market is widely considered as the closest to the free-market but investors can only sell at the NAFEX where they take a discount of as much as N80 per dollar. 

 As the unification programme flattens, throwing the forex market into a web of crisis, the Central Bank has embarked on a rather desperate option to save the naira from total collapse.  

On Friday as the external reserve plummeted to $35 billion increasing the pressure on the naira, the Central Bank kick-started the “CBN Naira 4 Dollar Scheme, an initiative that would give recipients of remittances an extra N5 for each dollar received. 

Experts have continued to balk at the ability of these quick fixes to unlock FX liquidity and turn the naira from a mere commodity currency to an industrial one.