Informal financial infrastructure, dwindling diaspora remittances responsible for Nigeria’s multiple U.S dollar rates’, shortages, Analysts say

Renaissance Capital says Nigerians may be smuggling in dollars
Nigeria stands out as biggest loser in remittances, EFG says
Nigeria haslargest informal sectors in the world

Nigerians living abroad could be sending more money home than authorities realize, bypassing official channels so their families can get more naira for their smuggled dollars on the black market.

Nigeria’s economy has one of the largest informal sectors in the world compared to other emerging markets and peers

Changing a greenback on Nigeria’s streets puts about a quarter more naira in the pockets of struggling Nigerian households than what they’ll get at the official rate. The central bank of Africa’s biggest economy uses multiple exchange rates and a raft of regulations to try and protect the local currency from further devaluations amid lower oil prices and a plunge in foreign investment.

Divergent Rates

Nigerians are being tempted to exchange their dollars in the black market
“When you have such divergent foreign-exchange rates, many expats will find ways to get money into Nigeria at the best possible rate,” Renaissance Capital’s Chief Global Economist Charlie Robertson said in an email. Currencies in countries including Kenya and Pakistan trade at about the same value in formal and informal markets, “so there is no reason to use backdoor channels.”

The sharp downturn in Nigerian remittances is in contrast with most other frontier and emerging-market countries that look poised to defy World Bank predictions for a 20% decline this year. Remittances may look better than they should because foreign workers are sending money back home as they lose their jobs and leave for good — especially for countries that rely on Gulf Arab states for their income.

While the cost of job losses might start mounting next year, the hit to remittances may be offset by improvements in tourism and export income, Robertson and a team of Renaissance Capital analysts said in a Nov. 17 report.

As the worst of lockdown restrictions that took hold between March and May lifted, more money has been sent home. Kenya reported a 9% improvement for the first 10 months of 2020 compared with a year earlier, while Pakistan has seen a 16% increase, according to the latest data from those central banks.

Nigeria’s massive shadow economy makes tracking inflows difficult, Robertson said.
In the Shadows

Nigeria’s economy has one of the largest informal sectors in the world
According to IMF estimates, informal sector contributed between 25% and 65% of GDP with Mauritius and South Africa at the low-end under 25% and Tanzania (over 50%) and Nigeria (over 60%) and the informal sector’s share of the global economy has been falling on average over the last decade, but it remains at a weighted average of 34% in Sub Saharan Africa, compared with 9% in North America and 15% in the OECD countries.

What is an informal economy,
An informal economy, is an economic activity that falls outside the regulated economy and tax system, such as street vending or unregistered taxi drivers, is hard to measure.

A paper by Brookings Institution fellow Ahmadou Aly Mbaye explains how to analyze the informal sector using Francophone West Africa as a case study.

Mbaye suggests we need to take into account the different types of informal businesses from relatively large companies to one-person employers of fewer than five people and that they may or may not be registered with authorities. But they almost all don’t pay any form of corporate taxes.

The difficult business environment of many African economies encourages small and medium sized businesses to remain informal. Unsurprisingly, high taxes and stifling regulation by a “low quality bureaucracy” top the list of grievances. Or to be more specific it is “how many taxes a company must pay and how much time it takes to declare and pay them, rather than the tax rates themselves which create a bottleneck for businesses.”

Another contributing factor is the oil producer’s decision in August last year to shut its land borders to curb smuggling and boost local production, which chopped off a vital source of foreign-exchange supplies, Mohamed Abu Basha, the head of macroeconomic analysis at Cairo-based EFG, said by email. Inflows from the rest of the continent account for 25% of Nigerian remittances.
Wrong Way

A decline in Nigerian remittances in 2019 may be repeated this year
Nigeria’s economy contracted 3.6% in the third quarter from a year earlier after crude output dropped to the lowest since 2016. Central bank Governor Godwin Emefiele said earlier this week that the naira’s official rate shouldn’t be determined by the parallel market, where the currency has weakened to a three-month low.

The drop in remittances “will further weigh on Nigeria’s already weak growth outlook,” Abu Basha said. It would have “negative connotations for foreign-exchange liquidity and disposable incomes.”

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