Nigeria’s diaspora may have switched to cryptocurrency, as official remittances fall by $6bn

By Temitayo Lawal

Posted on Thursday, 19 August 2021 17:00
A bitcoin user checks the receipts after buying bitcoins with naira on Bitcoin Teller Machine in Lagos
A bitcoin user checks the receipts after buying bitcoins with naira on Bitcoin Teller Machine in Lagos, Nigeria September 1, 2020. Picture taken September 1, 2020. REUTERS/Seun Sanni

Is Nigeria's rich and tech-savvy diaspora using cryptocurrencies to circumvent a struggling naira when they send money home to support family or invest? The Nigerian Central Bank seems to think so -- it is even launching an e-naira to compete with Bitcoin et al from October.

Diaspora remittance inflow into Nigeria declined by a consequential 27% to $17.2bn, down from $23.5bn last year.

The steep decline was $4bn more than the projection by the World Bank. The global financial institution had predicted that diaspora remittances to Nigeria would decline by $2bn due to the devastating economic impacts of Covid-19 particularly in countries where the funds originate from.

Conversely, cryptocurrency trade by Nigerians has continued to surge despite the government ban. Is this a coincidence? The Africa Report asks if the remittances really have declined that much, or if much of the transactions evaded official records, having been rerouted through increased cryptocurrency trades.

Bigger than oil

Diaspora remittances are a big deal in Nigeria. In 2015, Nigeria received more diaspora remittance inflow than what it earned from oil, the mainstay of the economy. Oil has accounted for over 50% of government revenue in the last five years and represents 80% of Nigeria’s foreign exchange earnings as well as 30% of banking credit, according to the World Bank.

In 2015, Nigerians abroad sent home $21.2bn while the country generated $19.6bn from crude oil sales throughout the same year. The trend continued through 2018 when oil export proceeds were approximately $7bn less than diaspora remittances.

Diaspora remittance inflow is the second largest source of foreign exchange earnings for Nigeria.

Nigeria’s high remittance figures are fuelled by its skilled diaspora. Educated, healthy and skilled citizens are more likely to migrate. Pew Research Center has explained that unemployment, insecurity and sparse future opportunities fuel migration in Sub-Saharan Africa where there is a mismatch between high population growth and slow economic development.

In 2019 alone, over 12,000 Nigerians migrated to Canada and 11,629 filed asylum claims – twice the number of Indians (from a country whose population is six times more than Nigeria’s), according to the Immigration and Refugee Board of Canada.

The cryptocurrency culprit

Peter Moses, a UK-based Nigerian finance and investment expert, believes that the shift to cryptocurrency trade may also be responsible for the decline that was reported in diaspora remittances for 2020. “As at last year, Nigeria was already ranking third globally, after the United States and Russia, of the countries with the highest cryptocurrency trading volumes.

Additionally, Nigerians in the diaspora have for the longest time barely tolerated banks and IMTOs because of their arbitrary rates, delays and transaction fees. “As rational economic agents, opting for cryptocurrency for this purpose would only be natural as it solves all these problems and offers better banking experience,” he says.

Apart from household consumption and spending, diaspora Nigerians also send money home to invest, procure assets or store value. To attract more remittances from its diaspora, Nigeria has pushed to leverage diaspora bonds and direct diaspora investments. In 2017, the country issued its first diaspora bond that raised $300m.

But the mismatch in the country’s fiscal and monetary management is increasingly making that option unattractive and unsustainable. Fitch Ratings, a credit ratings international organisation, in August 2019 warned that “attempts to reconcile competing goals through unconventional macroeconomic management and weaknesses in policy settings are raising medium-term vulnerabilities to shocks, which could make the economy more exposed to falling oil prices or disruptions to hydrocarbon production.”

In addition, personal investment actions by diaspora Nigerians have always tended towards buying risk-free assets in Nigeria such as government treasury bills, bonds and equities, but the yields on these assets in recent years have reached ultra-low levels. And to continue enjoying the kind of returns they have historically had, Peter believes that they would be naturally attracted to cryptocurrencies, which were yielding well at that time.

Shift spotted?

He compared Nigeria with other African peers… and thinks something doesn’t add up.

“If you look at comparable African countries which recorded increased remittance inflow [during the same time period] and the fact that the decline Nigeria experienced was steeper than World Bank’s projection, it means something was obviously different in the case of Nigeria and that wouldn’t be Covid-19, a universal crisis” Moses tells The Africa Report. “I therefore think that that decline wasn’t as huge as [was] reported but just a case of what was captured on official records, which is a reflection of the shift to cryptocurrency,”

As rational economic agents, opting for cryptocurrency for this purpose would only be natural as it solves all these problems and offers better banking experience.

From March through June this year, Nigerians traded Bitcoin (a cryptocurrency) volumes of over $225m on Paxful, a cryptocurrency trading platform.

This represents a significant increase in trading volumes on the platform before the ban by the country’s apex bank in February 2021. From November 2020 to February 2021, the trade volumes were about $180m according to the platform. With total $1.5bn trade volumes and 1.5 million users, the platform declared Nigeria as its biggest crypto market in April this year.

e-Naira: E for erratic

If you can’t beat them, join them.

Nigeria’s Central Bank Governor (CBN) Godwin Emefiele on 27 July announced that it would be launching the e-naira. Might that be an attempt to divert some of that diaspora crypto flow through government accounts, thereby stabilising Nigeria’s under pressure currency?

Ahmed Akinyele, a strategy and investment expert at L.A.T Cleveson, a Lagos-based investment company, tells The Africa Report that the Central Bank of Nigeria’s plan to launch its digital currency in October could be a fruitless venture because of their poor credit rating as an issuer and Nigeria’s unattractive macroeconomic indices.

“I don’t think the CBN’s e-Naira will capture the diverted remittances or generally boost remittance inflow. The credit rating of the issuer of any investment instrument is very critical to any investment attraction or decision. Nigeria’s credit rating is negative and that repels investors. The macro economic variables are also not great. We have been having sluggish growth, inflationary pressures have been on the increase . So, I don’t think there will be a massive adoption of the e-Naira,” says Akinyele.

The decision about adopting e-Naira by Nigerians in diaspora will largely depend on the form that the digital currency will take, says Peter, who believes there are just two possible forms: either they are given standalone currency status or they’re just designed as simple payment tokens.

He believes that if it is the latter, the same concerns that currently exist regarding unstable and arbitrary exchange rates and the value of remittance inflow (as it is more or less the digital equivalent of the Naira) remain. But if they are given currency status, there will then be discussions on how it will be priced. In other words, if it offers better pricing opportunities such that the sender gets a good rate when their remittances are converted to the local digital currency, that serves as an incentive and adoption is possible.

Innovative citizens beget unorthodox policy

Diaspora remittance inflow is the second largest source of foreign exchange earnings for Nigeria and with the CBN’s micromanagement regime of the exchange rates, they are likely to cling onto whatever boosts the foreign reserves. “The Naira for Dollar scheme by the CBN earlier this year was a signal that remittance inflow was declining. That was then followed by the cryptocurrency ban. That sends the signal that the monetary authority could see how cryptocurrency was diverting remittance inflow through that channel,” says Peter.

Nigerians traded Bitcoin volume worth $309.6m in 2020. South Africa and Kenya, whose trading volumes were $98.4m and $92.4m respectively, came in second. Since it seemed that the Naira for Dollar scheme, which rewarded remittance recipients with N5 for every dollar sent into the country through official networks, had not fully attracted the diverted remittances to the official channels, the CBN opted for an outright ban.

It is in the apex bank’s interest to play by the rules of the unorthodox game it is about to enter.

Interestingly, Nigerians have – in response – moved from the crypto exchanges that they used to trade with before the ban, to peer-to-peer (P2P) transactions. The country’s average monthly peer-to-peer Bitcoin volume, for example, has increased to $33.1m from $25.8m last year. In the first quarter of this year, the P2P Bitcoin trade by Nigerians was worth $99.1m, $62m more than what second-placed Kenya traded in the same period ($38.4m).

With the scheduled launch of the country’s e-Naira on 1 October (Independence Day), it remains to be seen whether it will be massively adopted. Nigeria’s policymakers should however take a cue from recent despite-ban cryptocurrency surge that citizens will continue to innovate around administrative bottlenecks.

It is therefore in the apex bank’s interest to play by the rules of the unorthodox game it is about to enter.

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