The Effect of Remittance Inflows and its Propagation Mechanism on the Nigerian economy

Building upon the existing work of Perez-Saiz et al. (2019), this research project aims at identifying the effect of remittance inflows on the level of economic activity across the economic sectors of the Nigerian economy, the largest economy in Africa. The flow of remittances into Nigeria has been on the rise from $22 billion in 2017 to $26.63 billion in 2018 (14% growth) and is expected to increase to about $34.8billion in 2023, subject to the global economic environment (PricewaterhouseCoopers, PwC 2019).

Remittance inflows accounts for about 6% of the country's GDP. This is quite significant given that oil, the country's main source of foreign earnings accounts for around 9% of Nigeria's GDP.

According to PwC (2019), the "2018 migrant remittances [to Nigeria] translates to 83% of the Federal Government budget in 2018 and 11 times the FDI flows during the same period". Remittance inflows into Nigeria were also around 7 times larger than the $3.4 billion net foreign aid received in 2017 (Dipeolu, 2020). This does not include the unrecorded remittances that flow through informal channels into the country.

The World Bank (2006) estimate a 50% addition to global recorded remittance flows if informal remittances are accounted for. Some of the reasons for a large proportion of informal remittances, particularly in Nigeria, include high cost of remittances and technology. The average cost of sending remittances to Nigeria and other Sub-Saharan African (SSA) countries is around 9%, which is about 25% higher than the rest of the world (PwC, 2019).

However, as more individuals and households in Nigeria are gaining access to bank accounts and mobile banking technology is gaining widespread use, the costs associated with remittances is gradually decreasing. Overall, the growing financial access in Nigeria is imperative to the role that the increased amount of remittance inflows could play in the economic growth and development of the country in terms of increased access to credit from banks and improved national welfare.

Following the methodology used in Perez-Saiz et al. (2019), this paper proposes to use the network framework from Acemoglu et al. (2012) in a multi-sector general equilibrium model to examine the impact of increased remittance inflows on the economic activity of various economic sectors in the Nigerian economy and how these positive effects are propagated across the country. According to Leontief (1974), an increase in demand in one sector can have significant impact on other sectors through input-output linkages. This implies that the sectors of an economy are

interconnected in one form or the other. Economic theory also tells us that there are sectors that are more productive and sectors that are less productive [Heckscher-Ohlin theory]. If the additional income from remittance inflows received by recipient households are geared towards productive sectors, we expect that this will have positive effects on the country's economy and negative or insignificant effects on the

economy if spent on less productive sectors. However, this is very much dependent on the strength of industry or sectoral linkages (Perez-Saiz et al., 2019). The main objective of this project is to quantify the impact of remittance inflows on economic activity across economic sectors in Nigeria by looking at the following questions:

(i) To what extent does remittance inflows affect innovation and patterns of growth in Nigeria?

(ii) How does remittance inflows affect different economic sectors in Nigeria with particular focus on the development of the financial sector and the financial systems of the country?

(iii) How are remittance inflows integrated into the overall national economy and what are the propagation mechanisms used? (iv) What are the effects of remittance inflows on the overall network (v) How would the Nigerian economy look like if there were no remittances?