Nigeria’s Forex Crunch: Diaspora Remittances to the Rescue?

Unarguably, the greatest challenge facing Nigeria today is its ‘collapsed’ economy, marked by acute shortage of foreign exchange (forex, FX), particularly, the dollar. This is particularly evident in the ranking of its currency—the Naira—as the third among the world’s worst performing currencies in the global FX market in 2023, according to a Bloomberg report. For decades, the country has remained largely a mono-product economy—producing and exporting virtually only crude oil—and living on petrodollars. In recent years, however, socio-economic and political developments within (and without) the country have combined to whittle the petrodollar earnings capabilities.

As the petrodollar inflow remains unsteady and keeps dwindling, other hitherto viable sources of FX are also practically drying up. Thus, for a combination of factors—including insecurity and high-cost business milieu—inflow of foreign direct investment (FDI) has dropped to a historic low. The same with foreign portfolio investment (FPI)—since investors can hardly ‘cash out’ at will or fully claim/repatriate their capital and earnings at maturity—owing essentially to paucity of FX.

In this regard, Nigeria’s total foreign capital importation declined significantly by 36.45 per cent to US$654.65 million in the third quarter (Q3) 2023 compared to US$1.03 billion in the preceding quarter, according to the National Bureau of Statistics (NBS) latest report. The NBS data showed that capital importation further dropped by 43.55 per cent compared to US$1.16 billion recorded in Q3 2022.

Further breakdown of the data shows that ‘other investments’ accounted for the largest capital inflows of US$507.77 million or 77.56 per cent of total capital importation for the review period. This was followed by portfolio investment (FPI) which recorded US$87.11 million, representing 13.31 per cent of inflows. On the other hand, foreign direct investment (FDI) accounted for a mere US$59.77 million or 9.13 per cent of foreign capital importation during the third quarter 2023.

Surprisingly, however, as these FX sources are ‘drying up’, the World Bank’s latest figures show that diaspora remittance inflows to Nigeria are rising. Specifically, the World Bank’s Migration and Development Brief (MDB) 2023 shows that out of US$54 billion diaspora remittances to Sub-Saharan Africa, Nigeria, with US$20.5 billion, stands as the largest recipient of remittances in the region. According to the World Bank, Nigeria retains its position as the dominant remittance recipient country, accounting for approximately 38 per cent of the total US$54 billion remittances received by the region. Impressively, Nigeria also ranks among the top 10 recipient countries worldwide, solidifying its significance in the remittance landscape.

Officially recorded diaspora remittance flows to Sub-Saharan Africa increased marginally to US$54 billion in 2023, as revealed by the World Bank’s MDB. The figure signifies a 1.88 per cent increase from the US$53 billion recorded in 2022 and a significant eight per cent growth from the US$50 billion recorded in 2021. Pan-African credit rating agency and research firm, Agusto & Co projects that foreign exchange remittance flows into Nigeria will rise to about US$26 billion by 2025, and will be supported by “improved economic conditions in advanced economies.”

But surely, the continued decline in foreign direct investment (FDI) and foreign portfolio investment (FPI) inflow into Nigeria remains a complex issue with multiple contributing factors. Some of the key drivers are macroeconomic and policy issues. Nigeria’s multiple exchange rate system (even after Naira floatation) and unpredictable access to FX create uncertainty for investors, making it difficult to predict returns and repatriate profits. Inflation at over 28 per cent (as of November 2023) erodes the value of invested capital and makes long-term planning difficult.

Also, it goes without saying that growing government debt raises concerns about the country’s future financial stability and ability to meet its obligations. According to Nigeria’s Debt Management Office (DMO), the country’s total public debt as at September 30, 2023, stood at N87.91 trillion or US$114.35 billion. This amount represents the domestic and external debts of the federal government of Nigeria (FGN), the thirty-six state governments, and the federal capital territory (FCT). The servicing of this debt takes a huge chunk of government income per time.

FDI and FPI inflow is also being constrained by frequent changes in government policies and regulations that create uncertainty and discourage long-term investment commitments. This adds to Nigeria’s inadequate infrastructure, including unreliable power supply, poor transportation networks, and limited access to clean water, which combine to increase operational costs and risks for businesses. Above all, security concerns are a ‘put-off’ to all investors: issues like terrorism, kidnapping, and piracy add to the perceived risk of investing in Nigeria.

Ironically, while these obstacles to investment (FDI and FPI) inflows persist, FX income from oil sales and non-oil exports are similarly challenged. Today, rather than Nigeria joining the rest of the world’s oil producing/exporting nations to enjoy the high and rising oil prices, the opposite is more the case. The country’s oil production (volume) has remained persistently short of the Organization of Petroleum Exporting Countries (OPEC)-allocated quota. This leaves Nigeria earning far less than it should from its oil sales. While the nation’s OPEC quota hovered around two million barrels per day (mbpd), until very recently, Nigeria has been producing merely about one million barrels per day.

The weird phenomenon of oil theft has become an existential threat to the oil and gas sector in Nigeria—leaving the country with less than 50 per cent of its produced oil to (officially) export. The volume and value of oil export per day largely remains in the realm of ‘mystery’—a mere guesstimate. Oil installations and assets across the country practically face perpetual vandalism, just as inhabitants/natives of oil-bearing communities often collude to cause oil leakages and spillages. All these combine to ensure declining oil production/sales as well as diminishing FX inflow.

Lately, too, Nigeria has been facing the likelihood of cut in its long-existing OPEC quota due to, among other factors, its perceived inability to meet such a quota. Oil production and supply dynamics among OPEC and its allies (OPEC Plus) does not show Nigeria as having the capacity to easily boost its production. The long delay in passing the Petroleum Industry Bill (PIB) into law frustrated not a few existing and potential investors in the sector. This was to the extent that many exploration and production (E & P) oil companies either cancelled their planned investments in Nigeria and/or redirected them to other climes.

Now that fortuitously, diaspora FX remittance is becoming a veritable/steady inflow into Nigeria as shown by the World Bank Migration Development Brief (MDB), all hands must be on deck to ensure the continuity. Unfortunately, rather than being a product of economic progress in the country, increasing diaspora remittance is more a function of more Nigerians emigrating to other countries. Apparently, to most emigrant Nigerians, it is the scotching economic condition at home that ‘pushed’ them abroad. And so, as many more Nigerians join the JAPA bandwagon, increasing remittances could remain the country’s indirect ‘gain.’ Perhaps!

• The author, Okeke, a practising Economist, Business Strategist, Sustainability expert and ex-Chief Economist of Zenith Bank Plc, lives in Lekki, Lagos. He can be reached via: [email protected]