Nigeria has experienced a significant increase in foreign currency entering the country from International Money Transfer Operators (IMTOs), reaching the highest level in six years. This increase can be attributed to the recent changes implemented by the Central Bank of Nigeria (CBN). In the first quarter of the year, the CBN’s quarterly statistical report revealed a significant increase in dollar inflows, reaching $1.07 billion, a 39 percent rise from the previous year’s $771 million. The growth also showed an increase of $965.3 million from the previous quarter (Q4).
The analysis indicates that the current scenario is alleviating the foreign exchange liquidity issues for the most populous nation in Africa due to significant inflows of dollars from overseas, primarily in the form of diaspora remittances, which serve as a crucial source of foreign exchange. According to Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise (CPPE), the increase in remittance income during the first quarter is a result of reforms introduced by the central bank to encourage more dollar supply from International Money Transfer Operators and the opening up of the foreign exchange market.
Rising IMTO have removed exchange rate barriers and eliminated limitations.
He stated that the increase in IMTOs has eliminated the exchange rate barrier, removing many previously existing limitations. The Central Bank of Nigeria has addressed the foreign exchange backlog for airlines and foreign investors, discontinued interventionist programs, consolidated exchange rate windows, and simplified access to dollars. In June 2023, the apex bank significantly changed the FX market by consolidating all segments into the Investors and Exporters window and re-establishing the willing buyer, willing seller model.
Also, the decision to liberalise the FX regime to stimulate Economic Growth resulted in a significant Naira devaluation. In June 2023, the exchange rate was ₦463.38 to the dollar, but by July 19, 2024, it had dropped to ₦1,596.92. Similarly, in the informal market, the naira went from 762 to the dollar to ₦1,580 per dollar by Monday. In January of last year, the CBN released a circular that eliminated the existing limit on exchange rates provided by IMTOs.
CBN tightens regulations on IMTOs, lifts ban on trading in official market.
As outlined in the circular, IMTOs were previously mandated to offer rates within a range of -2.5 percent to 2.5 percent of the Nigerian Foreign Exchange Market’s closing rate from the day before. In January 2024, the central bank introduced new regulations for International Money Transfer Operators, including a significant rise in the application fee for an IMTO license from N500,000 in 2014 to #10 million. This increase amounts to about a 1,900 percent increase over 10 years. The CBN set a minimum operating capital mandate of $1 million for international IMTOs and an equal sum for domestic IMTOs.
Furthermore, international money transfer operators cannot buy foreign currency from local markets to meet their requirements. However, a recent circular lifted the ban on IMTO trading in the official market. Gbolahan Ologunro, a portfolio manager at FBNQuest Merchant Bank (FBNQuest), stated that the reforms have incentivised individuals to use IMTOs to bring dollars into the economy, increasing engagement with official channels. According to him, the gap between the official and parallel markets significantly reduced, leading to a preference for IMTOs due to the assurance of fund security.
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Ologunro observed that the current market is experiencing a significant increase in the gap between the official market rate and the parallel market rate. This suggests that if arbitrage opportunities arise again, individuals will be less motivated to consider utilising IMTOs to bring in dollars. The key factor to consider is the main limitation preventing the flow of dollars through IMTOs. However, if the government can take action to reduce this barrier, the arbitrage opportunity will disappear. He explained that this would remove the incentive to use the parallel market, leading to increased inflows.