Naira may be on the verge of encountering a new crisis as the gap between official and black market exchange rates, which had almost disappeared a week after the foreign exchange (FX) rates convergence, has significantly widened over the course of one week.
Over the past weekend, the premium on the parallel market surged to above N150 per dollar, marking the highest level since June 14, which was when the Central Bank of Nigeria (CBN) introduced the rates convergence.
Yesterday, the closing rate for the Investors’ and Exporters’ (I&E) window stood at N774.78/$, in contrast to the black market trading rate of N890/$.
While the gap narrowed to N115 per dollar, representing a 15 percent margin, it remains significantly higher than the recommended five percent.
A wide spread is viewed as a substantial incentive for market manipulation and speculative transactions, both of which are prevalent in the country’s FX market.
However challenging the prospects may appear for the new FX market management approach, the combination of liberalization policies and the increasing departure of young Nigerian professionals is anticipated to drive diaspora remittances into the country, reaching a projected $26 billion by 2025.
Agusto & Co, a pan-African credit rating agency, highlights that this growth will be reinforced by the improved economic situations in advanced economies.
The agency emphasizes that these remittances from the diaspora have progressively become a crucial factor in Nigeria’s economy, serving as a significant generator of foreign exchange earnings and a catalyst for both economic expansion and development.
In 2021, Nigeria received remittances totaling $20.1 billion, making it the second-highest recipient in Africa, just behind Egypt which received $28.3 billion.
These two nations collectively accounted for more than half of all remittances sent to Africa.
While Egypt experienced a robust 16 percent increase in incoming remittances, Nigeria’s growth slowed down to a modest three percent.
This deceleration was attributed to the sluggish economic recovery and cost of living challenges faced by developed economies in 2022, indicating a recent downward trend.
This negative trajectory was worsened by the Central Bank of Nigeria’s implementation of capital controls and unpopular policies that restricted the inflow of remittances.
Furthermore, despite a notable surge in emigration during 2022, this hasn’t yet translated into a significant rise in remittances.
The majority of emigrants are students who are not expected to fully join the labor force in their host countries until mid-2023.
The agency suggests that as more Nigerians seek opportunities abroad due to the country’s gloomy economic conditions, their remittances will continue to play a vital role in sustaining the national economy.
The agency highlighted the remarkable growth of these funds, which has enabled dependents to fulfill basic needs, seek education, access healthcare, and engage in entrepreneurial endeavors.
Additionally, the agency emphasized that due to Nigeria’s high poverty rate and increased reliance on foreign aid, financing the essential needs of dependents remains a crucial factor driving remittances in the foreseeable future.
In June 2023, the Central Bank of Nigeria (CBN) introduced changes to the foreign exchange regime, unifying all segments into a single exchange rate window known as the Investors and Exporters (I & E) Window.
This move to a managed floating exchange rate regime is expected to enhance the attractiveness of remittance inflows through official channels, especially for investment purposes.
The unification of exchange rates is likely to improve FX liquidity, making fund repatriation more feasible.
For years, Nigeria has grappled with the issue of emigration and brain drain due to a growing number of individuals leaving in pursuit of better opportunities abroad, amidst the country’s bleak economic outlook.
Nevertheless, as students make up a notable portion of those leaving, Agusto & Co. anticipates a rise in remittance inflows in the foreseeable future, according to the agency’s statement.
