Interactive effect of exchange rates with remittance on informal remittance channel: a dynamic analysis

Abstract

Purpose- It has been commonly observed that remittance flows to low- and middle-income countries surpassed overseas development assistance. It is also often noted that the sums remitted through formal channels represent only a fraction of total remittances: a large though unknown amount of funds finds its way to families in migrants’ areas of origin through informal channels. In Nigeria for instance, there is high prevalence of informality and the country currently has multiple exchange rates and adopts the managed floating exchange rate system. The objective of this paper is to examine whether multiple exchange rate has been an incentive for the popularity of unsafe informal channels in the remittance ecosystem of Nigeria. In order to achieve the objective, this study examines the interactive effect of exchange rate with remittance on informal remittance channels in Nigeria. Methodology- Annual time series data were employed for the study. The data spanned the period 2004 to 2020 and were sourced from Index Mundi.com and the Global Economy.com. Autoregressive distributed lag (ARDL) model was used to analyze the data. Findings- The interactive term i.e., LOGOEXC*LOGREMR (official exchange rate * personal remittances received) has positive and significant influence on informal remittance channel only in the short run. Conclusion- Exchange rate has been an incentive for the popularity of unsafe informal channels in the remittance system of Nigeria. The implication is that government must carry out exchange rate reforms, including a unified market-clearing rate that reduces the gap between official and parallel market exchange rates which would enhance sending remittances through formal channels. Keywords: Exchange rates, remittance, commercial banks, autoregressive distributed lag (ARDL), Nigeria. JEL Codes: B26, C51 F31