The last year has seen the Naira dive by over 30% from a valuation of ₦362 to $1 in January 2020 to $470 at the end of 2020. As we near the end of March 2021 the situation at the black market has not improved at all with black market Buy/Sell rates being quoted at 480/485 currently.
Needless to say 2020 was a momentous year marked by the triple shocks of falling oil prices, coronavirus and the recession that hit the economy, all of which were exacerbated by the global nature of the pandemic. Whilst GDP, a key economic indicator, has improved in Q4 2020 (NBS announced GDP growth of 0.8% at the end of Q$ 2020) this has not had any impact on the currency.
CBN has, in 2020, tried hard to intervene and help meet the massive supply deficit that is driving the rate downwards. In this article we review three banking sector directives / actions that took place in 2021 that have impacted the way we are able to manage foreign currency in Nigeria. We look at the impact on consumers and provide some advise as to how to handle these changes to safeguard our wealth in a devaluing currency.
2021 initiatives that impact FX.
This article looks at 3 specific banking industry actions that impact FX, namely:
- CBN’s “Naira 4 Dollar Scheme”.
- Changes to pay out of diaspora remittances.
- Requirement for documentation for 3rd party FX transfers.
“Naira 4 Dollar” scheme
In a circular dated 5th March 2021, CBN outlined its Naira 4 Dollar scheme which will pay, to remittance recipients, an incentive of ₦5 for every $1 received as remittance inflow. The circular provides an overview of the scheme which began on Monday 8th March 2021 and will run until 8th May 2021.
What is the impact?
- The 3-month timeframe indicates that this is a pilot which will presumably yield enough data to enable CBN to gauge the impact, success and costs of implementing this initiative. The ₦5 incentive will be paid out in addition to the remitted funds and there do not seem to be any conditions, caps or restrictions attached to the receipt of the funds or their withdrawal.
- Who pays the money out? CBN does, and as stated in their memo ‘CBN shall, through commercial banks, pay to remittance recipients the incentive of ₦5 for every USD 1 remitted ‘. This could potentially be a large cost for CBN if that incentive tickles the fancy of even a small percentage of the Diasporans that are estimated to remit $20bn+ of funds annually.
- Recipients can walk away with the funds and the incentive and eventually spend both on consumption or some productive activity so there is the potential that the increase in spending will favour the economy as a whole.
Verdict: CBN is providing an avenue to boost spending and given the small window they clearly want to collate data and no doubt surprise us all with another directive in a few months’ time.
The boost to spending is positive for recipients so consider this option if you have identified a provider that pays out foreign currency on remittance.
Change to payout currency of Diaspora remittances.
About a year ago recipients of international money transfers had some flexibility in the way that they received their money. They could choose between local currency (often at a disadvantageous rate) or receipt in foreign currency (subject to the banks making it available to them). Additionally, recipients could choose to withdraw the money or have it transferred to their bank account. Fast forward a few months to the end of November 2020 and the story has changed, beneficiaries of Diaspora remittances will, henceforth, receive such inflows in foreign currency only through their bank with payments being made directly in cash or into a domiciliary account.
Why the changes?
CBN says that this is part of an effort to ‘liberalise, simplify and improve the receipt and administration of diaspora remittances into Nigeria’. With an eye to the future, they also cite the potential for the changes to help finance a future stream of investment opportunities for Nigerians in Diaspora, while also guaranteeing that recipients of remittances ‘would receive a market-reflective exchange rate for their inflows’.
Impact
From the perspective of you or I, this is a positive, no longer will banks force you to accept remittances in naira because they have ‘run out of foreign currency’ and the power is also in your hands to take the money and change it at the market of your choice. The additional ₦5 per $1 provides a nice boost to your naira pay out albeit for a short window of time.
Why would CBN prefer that remittances are not paid out in naira?
- Foreign currency remittance tracking. The ₦5 could be an incentive for people currently remitting funds by non-Bank means to use these official money transfer routes. Banks and International money transfer operators (IMTOs) have to make returns to CBN so they are able to gather accurate data regarding foreign currency payments. We don’t know what they will do with that information yet and whether it will be used in a way that favours consumers or not, only time will tell.
- Regulation of Banks activity in the FX market. By forcing banks and IMTOs to pay out only foreign currency this stops the banks from getting fx at a preferenetial rate from their customers which they are then able to sell on for profit at for profit at the I&E window and through other mechanisms. CBN appears to be trying to plug the gaps.
Verdict: This looks overall positive and it may be worth your while to take advantage of this premium being paid.
Documentation is now needed to complete International third party payments via digital platforms.
My bank wrote to me in the middle of March to advise that instant completion for international third party transfers on their digital platforms would cease from 20th March , 2021. It’s not clear what prompted this but given that a number of banks also took the same action it can be assumed that there was some kind of regulatory direction behind the scenes.
I, like many people, had grown to appreciate the ability to send international payments from my mobile banking app without having to make a trip to the branch. Going to the branch to make payment means the burden of having to queue, complete paper forms and also provide documentation before a payment can be made which, for time sensitive payments, can be frustrating. Going forward the process will not require a full reversion to the branch, just some additional steps.
The impact:
- Third party payments can continue to be initiated online however they will only be completed once relevant supporting documentation is received via email(check with your bank as this may differ).
- Examples of supporting documentation include invoices, bills, demand notices.
- Purpose of payment must continue to be clearly indicated.
One big positive that I noted was that international payments to an account in the same name overseas can continue to be made without documentation. This change only impacts payments to third parties.
The verdict:
Banks are tidying up their processes and keeping a closer eye on payments to third parties. Invariably the rationale will be linked to the reduction of money laundering, financial crime etc. That these requirements are being reiterated in the wake of End SARS and the cryptocurrency bans seen in this market is instructive.
Thank you for listening