For every 1 US Dollar sent to Nigeria, recipients back home are entitled to 5 nairas (NGN) extra as a bonus added to the Dollar received.

The above is the simple explanation of the ‘Naira 4 Dollar’ scheme set up by the Central Bank of Nigeria (CBN) on March 5th, 2021, just three months after effecting the new Dollars transfers regulations. The scheme- a foreign exchange incentive scheme for senders and receivers of international money transfers – was designed to boost remittance inflows and to attract these through the appropriate channels.

The ‘Naira 4 Dollar’ scheme

 In their official release, the apex bank explained that the scheme was created to sustain and encourage increased remittance inflow into Nigeria. All recipients of Diaspora remittances through CBN licensed IMTOs would enjoy the NGN5 bonus added to every USD1 received. The scheme kicked off on March 8th was to last 3 months.

Before the new International money transfer regulations, Q3 2020 remittances were running 33% below that of the previous year. Nigeria also experienced a major foreign exchange shortage which kept driving the Naira lower against the Dollar, so much so that the official exchange rate of the Naira was devalued twice in 2020. In a bid to boost remittances, increase the country’s foreign reserve and strengthen the Naira, the CBN had to come up with innovative measures.

The ‘Naira 4 Dollar’ scheme is one of such measures and a laudable one for that matter. Apart from serving the primary objective of encouraging increased remittance through licensed CBN channels, the scheme would benefit Nigeria’s foreign reserve. The latter is especially evident in the $620million added to Nigeria’s foreign reserve from remittances and rise in crude oil prices just weeks after the Naira 4 Dollar scheme kicked off. Remitters may be enticed to ignore unaccounted channels of sending remittance in favour of the CBN licensed channels, helping the country curb arbitrage practices and diversion of US Dollars to other countries. The Naira also appreciated against the dollar on the parallel market, going from N485 to 482 within the first week of April 2021.

A short boost or long-term fix?

While these efforts are meritorious on the CBN’s part, we can’t help but sense some grey areas of the Naira 4 Dollar scheme and why it may be a short-lived boosting of a solution we don’t have yet, to a problem we don’t yet clearly see. The CBN tries to model after the remittance incentives of countries like Bangladesh and Pakistan, but Nigeria does not enjoy some of the structures both states have in place to make such incentives really effective.

Both states, particularly Pakistan, enjoy great FX inflows from Emerging Markets (EM) equity investors which help mitigate the financial impact of the remittance incentives run in both countries. Nigeria earns very little from such unique remittance sources. The CBN, therefore, bears the cost of every NGN5 bonus paid out for every USD1 remitted. According to the World Bank data, Nigeria has averaged over $20billion in annual direct remittance inflow over the past 9 years. Based on this data, the CBN will be paying N17.5billion to FX receivers in bonuses between March and May.

Experts have also raised concerns about the subtle FX interpretation of adding more even Nairas for 1 US Dollars. The Naira depreciated by 1.09% against the dollar on Friday, April 16th, and fell a further 0.08% on Tuesday, April 20th, 2021at the Import & Export (I&E) Window to close at N410.67/$1. And despite gaining at the parallel market within the first week of April, the Naira saw a 0.83% decline to close at N486/$1 from N482/$1 on April 20th. On this note, many analysts believe that while the Naira 4 Dollar scheme may immediately impact the country’s foreign reserve, it poses a threat of further devaluation of the naira.

Away from that, the Naira 4 Dollar scheme, though creditable, further exposes to us the extent of the liquidity challenges within the Nigerian remittance space, especially since the new Dollar regulations. The CBN must be commended for the efforts put in place to salvage the Naira and indeed grow the Nigerian economy, but if we do not fix infrastructural issues such as the inadequate Dollar liquidity required for payouts across boards, the objectives of the new Dollar transfers policy would be defeated in the long run.

How Songhai Exchange can help

At Songhai Exchange, we believe that technology can help address such issues while working in full compliance with the CBN rules. The Songhai Exchange platform, through extensive integrations and relationships with banks and external partners, intends to lend a helping hand to solving these liquidity challenges. Our technology helps IMTOs gain access to all Deposit Money Banks in Nigeria through a single integration. By leveraging our understanding with banks, we can assist IMTOs to facilitate payments to FX earners in Nigeria.

Our goals align with that of the CBN, to accelerate remittance inflow and sustain it for a long time. The apex bank has taken the lead towards enhancing Nigeria’s remittance space with an anticipated rub off on the economy, it is only expected of remittance technologies like Songhai Exchange to give wings to that enhancement with innovation and breakthrough solutions.