Nigeria’s economy is on a precarious path, with dwindling export income, mounting debt, and a fast-depreciating currency. In response, the Nigerian government is increasingly turning to the substantial remittances from its diaspora as a critical component of its economic recovery strategy. This influx, amounting to approximately $20bn annually, represents a significant portion of the country’s foreign exchange inflow. However, a substantial amount remains unaccounted for in official financial channels, posing a challenge to monetary authorities striving to stabilise the naira.
For Jones Obi, a 47-year-old Nigerian software engineer based in Maryland, USA, Western Union was the traditional means of sending money home. His recipients would convert the received dollars to naira at competitive parallel market rates. However, with the scarcity of dollars in Nigeria, Obi, like many others, shifted to money transfer apps offering favourable parallel rates, albeit with concerns over their legitimacy.
In a bid to reintegrate such remittances into the official financial system, the Central Bank of Nigeria (CBN) has introduced measures to entice Nigerians abroad back to formal remittance channels. One significant policy is allowing international money transfer operators access to the Nigerian Autonomous Foreign Exchange Market (NAFEM), ensuring real-time naira value payments to recipients. This move aims to boost local currency liquidity and improve the timely settlement of diaspora remittances.
Governor Olayemi Cardoso acknowledges the pivotal role of diaspora remittances in enhancing foreign exchange liquidity and strengthening the naira. Reforms have sought to narrow the gap between official and parallel market rates, encouraging a more unified exchange rate system. In February 2024, diaspora remittances amounted to $1.3bn, reflecting their growing influence. These funds have been critical, averaging 80% of the federal budget in recent years, and surpassing foreign direct investment and aid flows combined.
Despite these efforts, a significant portion of remitted funds does not reach Nigeria’s shores. Estimates suggest that $18bn of the $20bn remitted in 2023 did not enter the country, often remaining abroad while the naira equivalent is paid locally. This practice exploits parallel market rates and deprives the Nigerian economy of much-needed foreign currency.
Past attempts to control remittance inflows included directives to pay beneficiaries in foreign currency. However, allegations emerged that money transfer companies were circumventing these regulations, prompting stricter enforcement. With Governor Cardoso’s tenure, there has been a policy reversal, now allowing naira payments sourced from the official foreign exchange market.
The Tinubu administration’s drastic measures, including naira devaluation and subsidy cuts, have exacerbated economic hardships. Consequently, diaspora remittances are seen as a potential buffer to mitigate these impacts. Financial analysts, such as those at Financial Derivatives Co., advocate for channeling these funds into development projects in education, healthcare, and infrastructure. High transfer costs remain a hurdle in fully capitalising on remittance inflows.
The World Bank recommends deploying diaspora funds for long-term developmental purposes, such as issuing diaspora bonds, a strategy Nigeria has previously employed with moderate success. A $300m diaspora bond issued in 2017 is set to be followed by more, with plans to establish a $10bn diaspora fund to support critical sectors while yielding returns for investors.
The remittance landscape is diverse, reflecting the varied Nigerian diaspora. From low-skilled economic migrants to high-profile investors, remittance channels differ significantly. Initiatives like the Nigeria Diaspora Investment Summit aim to attract diaspora investments in technology and business innovation, leveraging their emotional and cultural ties to the homeland.
Historically, the UK and the US have been primary destinations for Nigerian migrants, driven by political instability and economic hardship. Today, the financial contributions of these migrants have become vital to Nigeria’s economy, underlining the irony that those who once fled the country’s woes are now instrumental in its economic sustenance.
Dulue Mbachu is a journalist and writer who has worked with international news agencies including Reuters, the Associated Press, and Bloomberg News. His works include “War Games,” a novel based on the Nigerian civil war.
