The CBN’s New Playbook – And Why Tax Holidays On Investment Will Be Better

The CBN’s New Playbook – And Why Tax Holidays On Investment Will Be Better

As the Central Bank of Nigeria (CBN) policy of Naira 4 Dollar Scheme kicks off tomorrow, we would be looking at how the policymakers  respond when live data begins to arrive. I have called it a “quasi-devaluation” of the Naira, but with the understanding that it is a short-term experiment, we should wait for the data to hit the CBN headquarters. But before that happens, this is what I expect to happen across most countries: remittance  inflow will improve but most may not be real! 

The Central Bank of Nigeria (CBN) needs US dollars desperately to help cushion the nation’s balance of payment, and fight deterioration of the Naira, and is going to Nigeria’s best export: the diaspora community. Yes, the apex bank has unveiled a really ingenious scheme called “Naira 4 Dollar Scheme”. Largely, if you wire US dollars to Nigeria via the approved IMTO (international money transfer operators) like Western Union, the payout bank will pay your recipient N5 per $I besides the recipient receiving the full amount you wired in US dollars. The CBN Governor mentioned in a Diaspora Series organized by Fidelity Bank Plc.

Yes, expect someone to wire $10,000 from New York, gets paid $10,000 in Lagos, and then the N50k bonus. The cost of wiring that money is never going to be more than N50k ($120); the cost to wire $10k from US to Nigeria is $17 via Western Union. Some do think they can use peer-to-peer platforms to move that $10k back to New York, and send it back again for another N50k in Nigeria. This loop can continue, and they will rip big bonuses from the Nigeria treasury!

But note one thing: CBN is aware of this potential risk and that is why it has this requirement that people use the approved IMTOs like Western Union and MoneyGram. Those entities most times will not allow anyone to wire more than $10,000 in a month. And by the time you start shopping for who to help you make extra N50k on your $10k, you can lose that $10k entirely! Yes, a snake can swallow that money, big time, even in New York.

It costs $17 to wire $10k from US to Nigeria

I do think  that this policy is designed to incentivize Nigerian diasporas to send money home. It is too early to know if that will improve remittance over long-term; I mean after the program ends later in the year.  Personally, my choice,  as I noted in my Fidelity Bank presentation, would be to offer a seamless tax holiday on all profits through a special fund vehicle I called Diaspora Growth Nation Fund. 

Yes, if you invest in SMEs, startups, real estate or other productive areas, via official channels like banks, all taxes on profits over 5-10 years would be waived! That is a better way to get people to unload US dollars and hard currency on Nigeria. I am not sure people with many benjamins will care that $1 will add extra N5! That is a distraction! 

And if CBN is not careful, it could have a ponzi scheme on its hands with USD for Naira, being round-tripped, outside international money movement ordinance. Yet, the good news is that the bad guy will have to beat the US, UK in addition to Nigeria. And that is why I think abuse will be limited. But it is good to experiment and CBN is doing that which I think is good. It will see data and over time decide on what works.

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3 thoughts on “The CBN’s New Playbook – And Why Tax Holidays On Investment Will Be Better

  1. The tax holiday suggestion is a good one, you lose something to gain something. When a government has employment and human capital development as a priority, a responsible government can waive taxes, in order to get those issues sorted out. When your citizens are engaged and productive, you spend less on security and social upheaval.

    If fixing Nigeria’s economy will take 20 years, can we outline the productive sectors and start now? So that by 2040 we won’t be blaming previous administrations, rather we will be bequeathing a prosperous Nigeria to the kids coming along.

    What is unforgivable and immoral is that after blaming those who managed Nigeria since 1914 or 1960, we are still not doing anything to reverse the fall; that’s what I consider a real calamity.

    What is Nigeria’s problem and can we start the fixing immediately? I need actions, in a very pragmatic and intelligent way, every other yammering doesn’t really interest me.

    PEACE!

    Reply
  2. Another idea is to have a Diaspora USD savings account that pays at least 5%. Many diasporans will take it up. CBN just needs to limit the withdrawals to once a quarter or even less. That’s easy USD available through the year.
    You may ask, how can any bank pay that much interest? Well, if they charge a fortune (over 20%) for loans, why can’t they pay such interest on savings?

    Reply
    1. Honestly, if I see a bank that would guarantee 5% return on USD in Nigeria, even Warren Buffett will invest! For that to work, CBN will allow them to give loans in USD since they cannot get on Naira and pay loans on USD – it would be very hard in my opinion.

      Reply

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