January 14, (THEWILL) – Unarguably, the greatest challenge facing Nigeria today is economic in nature, marked by acute shortage of foreign exchange (forex, FX), especially 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. Economy diversification has largely remained a mere ‘mantra’ by successive governments.
However, in recent years, socio-economic and political developments within (and without) the country have combined to whittle Nigeria’s petrodollar earning capabilities. As a ‘global commodity’, crude oil business is usually prone to the vagaries of international politics and diplomacy.
Unfortunately, as the petrodollar inflow to Nigeria 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 an abysmally low level.
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.
Latest report by the National Bureau of Statistics (NBS) show that 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.
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 the least, 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.
As revealed in the World Bank’s MDB, officially recorded diaspora remittance flows to Sub-Saharan Africa increased marginally to US$54 billion in 2023; and this implies 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.
Also, a 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.”
World Bank’s reports show that Nigeria’s diaspora remittances have maintained a reasonably steady streak in the past five years or so. In 2018, Nigeria received US$23.1 billion; US$23.2 billion in 2019; US$23.6 billion in 2020; US$28.5 billion in 2021 and US$20.1 billion in 2022.
Interestingly, these inflows have seen Nigeria consistently remain the topmost recipient of diaspora remittances in sub-Saharan Africa throughout the past five years (2018-2023), in the World Bank’s ranking.
A number of factors account for this streak. For instance, the Central Bank of Nigeria (CBN) has implemented various initiatives to promote formal remittance channels, such as the Naira4Dollar policy and the licensing of mobile money operators. Fintech startups are also emerging with innovative solutions for faster, cheaper, and more secure remittance transfers. Also, financial literacy programs are helping in educating recipients on managing their finances and investing remittances for long-term benefits.
Also accounting for Nigeria’s topmost ranking as remittance destination is its significant diaspora population spread across the globe, particularly in the United Kingdom, Europe, North America, and other African countries.
Nigerians are known for maintaining strong family connections, even after migrating, which encourages regular remittance flows. Economic instability in Nigeria, compared to other countries in the African region, makes remittances a crucial source of income for many families in the country.
Thus, in recent years, remittances have become a major source of foreign currency for Nigeria, contributing to its GDP and boosting economic activity. These funds play a vital role in supporting the living expenses, education, and healthcare needs of families back home in Nigeria.
These significant strides notwithstanding, there have been persistent challenges associated with sending and receiving money. For instance, traditional money transfer services often charge high fees, especially for smaller amounts. These fees normally cut away a significant portion of the remitted amount, reducing the benefit for recipients.
Again, a large portion of remittances still flow through informal channels like friends, family, or ‘hawala’ systems. Obviously, these channels lack transparency and regulation, making them vulnerable to fraud and money laundering.
Without a doubt, many recipients of the remittances, particularly in rural areas, lack access to formal banking services. This makes it difficult to receive and utilize remittances efficiently. Also, fluctuations in the exchange rate (especially in recent months) adversely affect the value of remittances received in Nigeria.
This creates uncertainty and unpredictability for recipients. Complex regulations, many reforms and bureaucratic procedures discourage formal remittance channels and increase costs. Above all, concerns about corruption and insecurity in the land tend to also deter senders.
It should also be noted that a significant portion of remittances is used for consumption rather than investment in productive activities. This limits the potential long-term impact of remittances on economic development. It is also pertinent to reckon that global economic slowdowns or recessions (and socio-political conflicts in a number of places) have led to decreased income and employment for Nigerian Diasporans—affecting their ability to send remittances.
On the other hand, too, 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 factors include macroeconomic and policy issues.
Nigeria’s multiple exchange rate system (even after Naira floatation) and unpredictable access to FX create uncertainty for (FDI & FPI) 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 hampered 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 hurdles to investment (FDI & 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 and 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 Okeke is a practising Economist, Business Strategist, Sustainability expert and ex-Chief Economist of Zenith Bank Plc *
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