Reading between the lines

The money transfer edition

Another day another circular with new foreign exchange related regulations, and confusion everywhere. I got a lot of questions on this so I thought it would be useful to write a word or two.

First, the overall context. In the past decade the two of the largest sources of foreign exchange inflows besides portfolio funds have been crude oil and remittances. The CBN, who appears to have given itself a mandate to keep the USD-NGN exchnage rate fixed, has almost complete control of crude oil inflows. It unilaterally collects all governments’ inflows and recently it has tried (and maybe succeeded - I am not sure) to collect inflows from the oil companies too. It then uses this monopoly power to decide what and what can be done with FX.

Remittances though. That has been a lot more complicated. First, the bulk of remittances do not pass through the CBN. Most of it comes as stuff that is sent: cars, clothes, etc. At least we think so. No one is really sure. Whatever else comes as cash comes in through various channels: cash given to people, the old money transfer guys (western union and moneygram), banks (mostly for large transactions), and recently new fintechs and crypto. For most of these channels the CBN has almost no control over those inflows and what they are used for. Which means that people can use these inflows for anything including things “not valid for foreign exchange” according to the CBN.

This is the context in which to see the new regulations. In the big picture it is the CBN trying to gain some control of these remittance inflows. It’s plan? No off-shore transactions. You must bring the inflows in either digitally through banks (which it has control over) or in cash (which it hopes it has some control over at least as far as preventing that cash from going out again). The short term target is to satisfy the parallel market and reduce pressure on the USD NGN exchange rate. Will it work? Probably not. Why? The bulk of remittances still come in as stuff. And there is also crypto.

But as with all policy changes there is collateral damage. That, in this instance, is remmittance micropayments. The new fintechs, like world remit, transferwise and azimo, have been leveraging on banking and payments infrastructure and mobile connectivity to reduce the transaction costs invovled in international money transfer which has made micropayments possible. That model depends essentially on matching buyers and sellers without really having to move money accross borders. For instance, persons A to J want to send to Nigeria and persons K to Z want to send to the US. You match them behind the scenes and then at the end of the day move whatever the overall balance is in one transaction. In the Nigeria context, because there is literally an endless queue of people looking to buy dollars off shore for other things besides remittances (thanks to our weird FX policy and regulatory environment), most of the IMTOs don’t bother actually setting up shop in Nigeria as they technically do not offer transfers from Nigeria.

You can debate a bit about the validity of having IMTOs register in Nigeria even if they don’t offer services from Nigeria. But in terms of the collateral damage, the requirement to physically move foreign exchange to Nigeria either to banks or in cash breaks the business model for micro-remittances. The new transaction costs involved in sending $35 from the US to Nigeria have now become prohibitively high that it probably no longer makes sense to do so. Those of you who have followed the mobile money fiasco over the years will understand this very well. For example it costs $3 to send $35 to Nigeria via Western Union. A not so small 8.6%. Recieving also comes with its costs. Collecting $35 from a bank in Nigeria is difficult and time consuming and from cash payout partners probably even more difficult. Not to mention annoying.

A couple of IMTOs are still trying to see if they can make it work though. So we will see. I am not an entrepreneur but it is difficult to see how they can. How large are micro-remittances as a share of all remittances? I don’t know. But given the structure of the Nigerian economy I would bet it is not small.

Anyway, what is the long and short of this story? It is yet another example of another policy trying to control foreign exchange that comes with real costs to the economy. With policy makers once again choosing foreign exchange over the economy. Unfortunate.