Whither remittances in the Nigerian economy?
Even on the official figures, remittances last year were the equivalent of 6 per cent of GDP. There is therefore the scope for the FGN, and state governments through community associations or even faith groups in the diaspora, to make a developmental impact with innovative policies.
In the conversation about the diversification of the Nigerian economy, a favourite statistic is the overwhelming share of oil and gas in merchandise exports. The share in 2017 was 92 per cent but falls to 57 per cent when we expand the cake to all current-account inflows. Remittances provided 30 per cent of the enlarged total, with the small balance made up of credits on the services and income accounts as well as non-oil exports.
Annual remittances are running at about US$22bn, or in naira terms about three-quarters of total spending in the 2018 budget. Put another way, this represents about US$1,200 per head for the diaspora estimated at 18 million Nigerians. This is a stable inflow, unlike portfolio investment or even development assistance. There are seasonal variations, notably a peak every year for the holiday season in the fourth quarter.
The data in the CBN’s balance-of-payments is consistent with the numbers in the World Bank’s latest Migration and Development Brief (no 29), published this April. The annual total has barely moved in recent years although the Bank’s document projects increases in aggregate across sub-Saharan Africa (SSA) of 7.0 per cent this year and 5.6 per cent in2019.
Its projections are based broadly upon its global economic outlook, without drilling down into the origins of remittances per country. In Nigeria’s case, the US, the UK and Italy topped the table of sending countries in 2015 according to Western Union, and the top ten were all OECD states. (The exceptions were the UAE and Malaysia.)
Conventional wisdom is that the recorded total is substantially understated. Nigerian banks looking to develop this business in the diaspora estimate that the actual annual total could be closer to US$40bn. The cost of remittances is a disincentive. The World Bank’s brief noted that transfers to SSA were the most expensive of all regions. It estimated that 9.4 per cent of a US$200 remittance to the region was deducted in fees in Q1 2018, a small improvement on 9.8 per cent in Q1 2017. In addition to the fees, senders and recipients incur additional costs because they have to take time off work to visit the intermediary. The launch of digital money transfers is starting to lower costs but we should assume that remittances into Nigeria are rather higher than officially stated.
The more interesting question is the impact of remittances on the broader economy. This becomes a matter of guess work because the recipient institutions (banks and money transfer agencies) are not required to ask the beneficiaries for any information.
The expansion and modernisation of villages and towns in the state in Kerala in southern India are proof of the journey made by many professionals to employment in the Gulf states. Citizens of the former Yugoslavia would work in car factories in West Germany and invest their savings in small hotels on the Dalmatian coast to generate income on their retirement. The Nigerian diaspora is particularly diverse however, so we cannot point to such obvious examples of development driven by remittances. House-building and support for elderly relatives are two likely beneficiaries. One London-based money transfer agency estimates that 80 per cent of the funds it wires to Nigeria are intended for family support such as school fees, health care and food. The share is probably lower for remittances through banks.
Our suspicion is that remittances help to drive the informal economy. Policy documents in Nigeria and other developing countries routinely identify the diaspora as a target to tap for investment. The FGN did raise US$300m from the launch of its maiden diaspora bond, a five-year instrument, in June 2017. It could repeat the exercise, having done the initial marketing. India and Israel are probably the leaders in tapping the diaspora for regular budget financing.
Returning to remittances, governments could do rather more. They could take the view that the inflows underpin the economy, albeit in ways that are not obvious, and remain on the sidelines. Alternatively, they could look to channel some of the inflows for their developmental objectives. We hesitate to recommend another fx rate and window in Nigeria, and are thinking more of incentives. The FGN is considering a proposal allowing the diaspora to vote in Nigerian elections.
It could combine incentives with its plans to expand the tax-paying economy. Attractive terms for investment in SMEs and special economic zones are two possibilities. Ethiopia has some experience of the second, and Morocco of the first. Even on the official figures, remittances last year were the equivalent of 6 per cent of GDP. There is therefore the scope for the FGN, and state governments through community associations or even faith groups in the diaspora, to make a developmental impact with innovative policies. When we make this call, we are familiar with the way that incentives in Nigeria can sometimes distort the economy and diminish government resources.
Gregory Krosten is Head of Macroeconomic and Fixed Income Research FBNQuest Capital