UNIVERSITY OF ILORIN

FACULTY OF MANAGEMENT SCIENCES

DEPARTMENT: INDUSTRIAL RELATIONS
AND PERSONNEL MANAGEMENT

COURSE CODE: BUS 320

NAME: IDRIS MARIAM

MATRIC NUMBER: 17/66RP062

Assignment

“Naira for Dollar” scheme was introduced by Central Bank of Nigeria (CBN) as foreign exchange
incentive which is to run from 28th of march to 28th of May 2021. As a financial management student
access the scheme and its effect on: Foreign exchange, value of Naira, International trade.
 For the second time in less than four months, the Central Bank of Nigeria, CBN,
introduced another policy, Naira for dollar scheme, to increase diaspora remittance inflow into
the country. “The new policy is expected to enlarge the scope and scale of foreign exchange
inflows into the country with a view to stabilizing the exchange rate and supporting accretion to
external reserves,” as said by the CBN Governor. The apex bank had earlier in December
introduced a policy that allows beneficiaries of remittance inflow to receive cash payment in
foreign currency of their choice. In a circular announcing the policy in December, the CBN
stated: “International Money Transfer Operators, IMTOs must ensure that all funds in favor of
beneficiaries/recipients in Nigeria be deposited into the Agent Banks ‘correspondent account.
“Agent Banks (Deposit Money Banks) in Nigeria will be responsible for the payment to
beneficiaries/recipients either in foreign currency cash (USD) or into the beneficiaries/recipients’
domiciliary account in Nigeria. “The mode (of payment either in cash or transfer) is at the sole
discretion of the beneficiaries/recipients.” The expectation of the apex bank is that the policy will
help to deepen the foreign exchange market, provide more liquidity and create more transparency
in the administration of Diaspora Remittances into Nigeria.

To complement this policy, especially in terms of encouraging diaspora Nigerians to

patronize official channels for remittance transfer, the CBN introduced the Naira for dollar
scheme on Saturday, March 6th. Under the scheme, the CBN introduced a rebate of N5 for every
$1 of remittance sent through licensed International Money Transfer Operators, IMTOs.
According to the apex bank, the rebate will be provided to the bank accounts of beneficiaries
following receipt of remittance inflows. Rationale for the New Policy Explaining the rationale
for the policy, CBN Governor, said: “The apex bank believe this new measure will help to make
the process of sending remittance through formal bank channels cheaper and more convenient
for Nigerians in diaspora. “This policy on the administration of remittance flows is aimed at
increasing the transparency of remittance inflows, reducing rent-seeking activities and providing
Nigerians in diaspora with cheaper and more convenient ways of sending remittances to Nigeria.
“In addition, this new policy measure will encourage banks and financial institutions to develop
products and investment vehicles geared towards attracting investments from Nigerians in
diaspora.

The CBN has no doubt that these changes can help to finance a future stream of
investment opportunities for Nigerians living abroad.” Inspiration from abroad Citing the
experiences of other countries like Bangladesh and Pakistan, vis-a-vis the effectiveness of
incentives in boosting remittance inflow, “The use of reimbursements of remittance fees has
been critical in supporting improved inflow of remittances to countries in South Asia and in
improving their balance of payments position following the COVID-19 pandemic. “Over the past
three years, Bangladesh and Pakistan had embarked on separate but similar initiatives to reduce
the transaction cost of sending remittances through formal channels. “In June 2019, the
Bangladeshi government launched an initiative to pay a percentage of the total amount remitted
to beneficiaries in Bangladesh. “This scheme has helped to significantly improve remittance
inflows. For example, between July 2019 and February 2020, Bangladesh received $12.5 billion
in inflows, reflecting monthly inflows of $1.5bn. “Between July 2020 and February 2021,
inflows using formal channels rose to $16.7bn reflecting average monthly inflows of $2.1billion
notwithstanding the effects of the COVID-19 pandemic on the global economy. “In Pakistan, the
Central Bank of Pakistan launched a remittance initiative scheme whereby the Central Bank
offers a rebate on remittances to beneficiaries. “In addition to the elimination of charges and
significant marketing schemes, remittances inflows into Pakistan exceeded $2.0 billion for the
eighth straight month in January 2021 at $2.3 billion, up 19 per cent from a year earlier,
according to a report from the Central Bank of Pakistan. “The bank noted that the increased
inflow of remittances using formal channels was due to incentives offered to their diaspora
community.”

In general, the new policy is expected to enlarge the scope and scale of foreign exchange
inflows into the country with a view to stabilizing the exchange rate and supporting accretion to
external reserves. “More importantly, it will provide an opportunity for Nigerians living abroad
to make investments in their home country.” However, this optimism is not entirely shared by
analysts and members of the organized private sector.
 In the face of it, the scheme should encourage Nigerians working abroad to remit more
into Nigeria and thereby improve the forex inflow. “However, we need to dimension the inflows
which have historically been 70 per cent for family support and 30 per cent for other purposes,
including real estate which carries the greater part. “In order to yield more of the anticipated
inflow for investment in productive activities, the CBN would have to work with the banks and
other relevant government agencies to initiate portfolios and measures to point the remitters in
that direction,” he said. While also commending the new policy, Director-General, Lagos
Chamber of Commerce and Industry, LCCI, Muda Yusuf, advocated further reforms vis-a-vis
dollars from export proceeds and foreign portfolio investors. He said: “This will surely have a
positive impact on inflows and ultimately on the exchange rate. “The current practice of
imposing the Nigerian Autonomous Foreign Exchange Fixing, NAFEX rate on export proceeds
should be discontinued in the spirit of the current move to incentivize forex inflows. “Similarly,
Foreign Direct Investments, FDI and Foreign Portfolio Investments, FPI should be allowed
greater flexibility in conversion rates of their inflows. A combination of these supply side
strategies would have a remarkable impact on foreign reserves, forex liquidity and the naira
exchange rate. The Naira4dollar scheme, if properly implemented, would have positive impact
on the nation’s modest exit from recession, boost foreign exchange input and result in reduction
of pressure on the naira.

This is perhaps what inspired this Naira-4-Dollar scheme by the CBN. “Annual figures in
recent years range from 22 billion dollars in 2017 to 23.63 billion dollars in 2018 and the
projection before COVID-19 was that it will go as high as 35 billion dollars by 2023. “As the
global economy rebounds and takes a new upward trajectory, I am of the view that this is why
the CBN has taken this strategic option to encourage remittances from our diaspora which is
quite huge and located across the world. “Properly implemented, I think it may have a positive
impact on our modest exit from recession, boost our foreign exchange input and hopefully result
in reduction of pressure on the naira.” Challenges While noting the new policy can lead to
increase in forex supply and accretion to the nation’s external reserves, analysts at Financial
Derivatives Company Limited, however, noted the challenge of malpractice like round tripping
and arbitrage. They said: “This initiative is expected to increase Diaspora remittances flow into
the country, boosting forex supply. This will also stem the depletion in the gross external
reserves level. “As forex supply increases, we expect demand pressures to ease with a possible
naira appreciation especially at the parallel market. Year-to-date, the naira has lost 2.55 per cent
at the parallel market (currently trading at N482/$). “More importantly, the new policy is likely
to reduce the premium between the parallel market and the Investors & Exporters, I&E forex
rates (currently at N71). It will also reduce the cost burden of remitting funds to Nigeria by
Nigerians in the Diaspora. “A potential risk to this development is that there will be attempts to
roundtrip and arbitrage the system. In addition, the current pandemic and furloughs could cut
deep into the inflows. This is because foreign remittance is largely dependent on the economic
conditions in the global economy, particularly the originating countries.

“According to PWC, the bulk of Nigeria’s remittances flow came from the US, UK,
Cameroon, Italy, Ghana, Spain, Germany, Benin Republic, Ireland and Canada in 2017. “The
good news is that all these countries are expected to recover from the COVID-19-induced
recession in 2021 with an average growth rate of 4.3 per cent. On their part, analysts, United
Capital Securities, identified the parallel market exchange rate as a major challenge to the
efficacy of the policy. They said: “In our view, a N5.0 premium for each dollar deposit from
remittances results in a deposit expense of 1.2 per cent, less expensive compared to the stop rate
on Open Market Operation, OMO treasury bills auctions to foreign portfolio investors, which is
intended to accomplish the same goal. “With $34.7 billion in dollar reserves (as of March 12),
the CBN needs at least $6 billion in foreign reserves to be comfortable enough in increasing the
dollar. “Thus, if this scheme succeeds, the strategy brings about the much-needed convergence of
rates in the currency market.