Currency Market: Is “Naira 4 Dollar” the Way Out?

Recently, the Central Bank of Nigeria introduced the “Naira 4 Dollar Scheme”, a policy that rewards senders and receivers of overseas money transfers with Naira. The strategy aims to increase dollar liquidity in the country at a time when the country is facing a foreign exchange crisis that has prompted the central bank to devalue the naira more than once in the last year. Specifically, the scheme seeks to capture unaccounted remittances into the system.

According to the World Bank, remittances into Nigeria from abroad equal more than $20.0 billion a year. Recipients of diaspora remittances sent through the CBN’s International Money Transfer Operators (IMTOs) can now get N5 for every $1 in remittance inflow.

In our view, a N5.0 premium for each dollar deposit from remittances results in a deposit expense of 1.2%, less expensive compared to the stop rate on OMO auctions to FPIs, which is intended to accomplish the same goal. With $34.7bn in dollar reserves (as of March 12th), the CBN needs at least $6.0bn in foreign reserves to be comfortable enough in increasing the dollar.

This, if the scheme succeeds, the strategy brings about the much-needed convergence of rates in the currency market. The downside, though, is the parallel market, where the currency continues to trade at a significant premium to the official rate.