Nigeria is not making it any easier for foreign investors and entrepreneurs to buy into its high-yielding assets.
Godwin Emefiele, the Governor of the Central Bank of Nigeria, announced the introduction of an incentive of N5 for every $1 of remittances at the beginning of this month. He explained that the aim was to increase incoming flows of foreign currency, and, in the process, support the stability of exchange rates. However, instead of unifying its exchange regime, the CBN has intervened in the economic market.
As a response to the matter, economists blamed speculators hoarding the USD (in anticipation that the naira would devalue) , and an increased pressure by international organisations like the International Monetary Fund, the World Trade Organization and the World Bank on the CBN to devalue the naira.This pressure has further fuelled stress in people’s belief that the naira will fall further. Investors have clamored for reforms to simplify Nigeria’s multiple exchange rates, curb inflation and remove barriers to capital flows. Imbalance is poignant in the system.
According to Anais Auvray, West African consultant at the Africa Matters advisory firm in London, the scheme “enhances the probability that more naira will need to be printed, increasing the risk of further devaluation against the dollar.”
The policy could make a small contribution to higher remittance inflows, but recovering labour markets in countries with large diaspora communities, like the US and the UK, would potentially be a more important factor.
So, who is being affected by this?
Nigerian manufacturers and entrepreneurs have expressed their difficulties in accessing dollars to pay for their imports. It has proved extremely difficult to source foreign exchange for the importation of machinery and raw materials, even after CBN started selling USD to banks and bureau de change operators in the final quarter of last year, in an aim to improve access.
After oil price plunged following the COVID-19 pandemic, the liquidity of the Dollar dried up in Africa’s biggest crude producer. The exportation of Crude accounts for 90% of foreign exchange earnings in the region of West Africa. To release the pressure on the economy, authorities have already devalued the local unit twice in 2020.
Another victim is – parents. The difficulties of accessing forex from banks to pay for children’s school fees abroad has left Nigerian parents feeling hopeless as requests pile up in banks for weeks. This development has meant that some Nigerian families have resorted to buying bitcoins to fund school fees, whilst others have said that they have purchased forex through the parallel market. Usually the time taken to pay overseas school fees at Nigerian banks takes around 24 hours of filling a CBN document “Form A” at any commercial bank.
The current delay is as much as six weeks to two months for customers.
In a report by Punch, a parent, Maria Adigun, whose son is studying at a Turkish university, has stated that she has been experiencing “unimaginable pain” in an attempt to pay her child’s school fees, which has to be paid in dollars.
She explained that “I had to put in my application for the purchase of the dollars about three months ago, specifically early January, by depositing enough naira in my account. I was asked to keep checking with them to know when it would be my turn, since the bank claimed that some people were in the queue before me.
“I kept checking, almost every three days since January 5th, 2021, but up till March 7th, there was no success. There was a day I wept openly in the banking hall because the calls I was getting from my son was affecting me psychologically.
“I would not have dabbled into sending him abroad if it were to be now, but that was what his father wanted while he was alive. Unfortunately, he died a year after my son, Ibidapo, resumed his academic programme abroad. I did not want to dampen his morale, so I had to continue paying. Now, he has two years to go.”
However, some people are optimistic about the policy’s potential. The policy will definitely achieve its objective to some degree, as it will encourage Nigerians in the diaspora to remit foreign exchange. It is hoped that the policy will significantly contribute to the level of foreign reserves. However, it is more probable that this positive impact of increased foreign reserves will be a likely byproduct of the high dollar demand’s persistent pressure.
Nigerian officials may be forced to resort to certain steps to avoid the value of the Naira falling. This could mean limiting foreign cash withdrawals and stopping Nigerian from depositing USD into their domestic accounts. This poor economic outlook means that some parts of Nigeria, like Abuja, will not be able to allow the Naira to float freely. Nigeria has only just come out of the recession, and it is predicted that over 11 million more Nigerians are expected to fall into poverty by 2022, as a result of the COVID-19 pandemic. The stability of the Naira is highly dependent on the Nigerian government’s commitment to diversifying and developing its economy in a more flexible manner, to promote economic growth. However, the current instability and lack of commitment has made it probable that the HNWIs and entrepreneurs of Nigeria will choose a different path to protect their funds.
The solution? Diversification of assets, and dual citizenship. Being able to generate revenue in a strong currency, like the pound sterling, in an off-shore bank account, and having residency or access to another country helps immensely in times of need.