A recent policy by the Nigerian government has sought to leverage remittances to increase the country’s foreign capital. But as Femi Bolaji writes, because the policy puts barriers in the way of money transfer it might have the reverse effect.
In November 2020, the Nigerian government made a radical change to money transfers into Nigeria. The new policy mandated that all foreign money transfers must be paid in US dollars, either as cash or credited in a US dollar denominated account. Before the regulation, remittances were paid in Naira through a wide variety of channels including mobile money.
Nigeria’s policy was a response to a 27.7 per cent fall in remittance flows during the Covid-19 crisis. They fell from $23.8 billion in 2019, when Nigeria was the sixth-largest remittance receiving country among low- and middle-income countries, to $17.2 billion a year later. It was the sharpest decline in recent history.
The fall exceeded the World Bank’s prediction of a 23.1 per cent decline in remittances to Sub-Saharan Africa, due to the pandemic. To compound matters, during the crisis, remittances to other Sub-Saharan countries, excluding Nigeria, increased by 2.3 per cent.
In formulating the policy, the Central Bank of Nigeria claimed that money transfer operators were not channelling transfers to Nigeria through official banking mechanisms. Instead, they were trading the flows in ways that enabled them to exploit differences between the prices of foreign currencies and the Naira. As a result, the Bank argued that the Nigerian economy was not benefiting as much from remittances as it should.
How the policy played out
Senders and receivers – including family members, people in the community and the government – often have divergent expectations of remittances. The primary motivation behind remittances for migrants is to help the people they left behind. Policymakers and governments are more interested in leveraging remittances for wider development purposes. This conflict can be seen in the design of the Bank’s new policy.
The policy focussed on helping the government shore up its foreign currency reserves. It did not give enough consideration to the factors that shape remittance transfers, such as the ease of sending and receiving money. Instead, the policy has imposed new constraints on receivers. For cash payments, they must physically go into a bank and produce ID, afterwards, people will need to exchange the dollars into Naira because dollars are not legal tender in Nigeria.
In spite of the government’s keen interest, remittances are more than money, and financial transfers are only a single material part of complex relationships between senders and receivers. While the policy appears to have contributed to a moderate rebound in remittances in 2021, it will have far-reaching implications on relations between senders and receivers on one hand, and the government on the other.
People who are not able to go into a bank, and those who do not have the required identity documents, will be excluded from receiving direct cash payments and will have to rely on proxy arrangements. Those who are not able to open dollar denominated accounts, because of the requirement for identity documents and reference forms, will also be excluded from the new remittance network.
The future of remittances
Counter-productively, this is likely to lead to an increase in the use of informal intermediaries, for example, sending cash with family members and friends who are travelling to Nigeria, and using unregistered money transfer operators. This increases the risk that money will not reach its intended destination.
People wanting to send money home will be drawn to informal settlement arrangements between senders and receivers or their agents, peer-to-peer transactions, and FinTechs which are able to circumvent the government’s strict requirements for remittance transactions. The policy’s objective of improving the government’s balance of payment position through remittances may turn out to be counterproductive.
Nigeria’s remittance policy also stands in contrast to other government policies which have been aimed at reducing the amount of cash in the economy. Policy inconsistency fosters mistrust of the government among citizens and could discourage Nigerians, particularly those abroad, from participating in the wider economy.
Efforts to leverage remittances for socioeconomic growth cannot rely on remittance mobilisation policies alone. It is important to have an in-depth appreciation of remittance motivations, and the social relations and connectivity between senders and receivers. After all, these are the drivers of the money that migrants send home in the first place.
This blog is based on a research project at SOAS, University of London on remittances between the UK and Nigeria.