The first quarter (Q1) capital importation data arrived last week, as expected, with the majority of the figures in the red. The country received $1.57 billion in total during the quarter. The statistic fell 17.46 percent year over year (YoY), but the quarter-over-quarter (QoQ) performance was even worse at -28.09 percent.
Nigeria’s capital imports have been on a downward trend for the previous three years, falling from $23.99 billion in 2019 to $9.66 billion in 2020 (at COVID-19’s peak) and finally to $6.7 billion last year. It was clear from the start of the year that Nigeria and other emerging markets that rely on foreign investment dollars to grow their economies would have a difficult year.
The first red flag was a proclivity to align with the west. Last year, the United Kingdom began to reverse the low-interest rate period, just as the Federal Reserve System of the United States signaled the end of the pandemic-triggered expansionary monetary system that had been used to combat inflation.
A significant outflow of capital from underdeveloped countries has been predicted by the World Bank and the International Monetary Fund (IMF). With the Fed’s effective start of quantitative tightening last week, the following months could be even more difficult for regions designated high-risk.
De-risking across asset classes and regions began in earnest in January. However, most developing countries confront similar issues, and it is clear that Nigeria’s position will be exacerbated by rising political risk and continuing foreign exchange market challenges.
According to Bala Zakka, an energy economist, Nigeria has become a near-pariah state in the investment community, with many foreign organizations and people unwilling to make final investment choices due to unresolved talks (FIDs). The overall insecurity manifested in hostage-taking, banditry, and vandalism influenced Zakka’s thinking.
The political danger has recently compounded the problem, with Godwin Owoh, an applied economics expert, telling The Guardian that 2022 is more of a lost year for Nigeria. 2020 was a ‘dark’ year for the country and many others, with economic activity stalling, commerce slowing, and several businesses shutting down completely.
Nigeria crumbled under the weight of politics just as the economy was picking up speed. For example, in the last two weeks, politicians have virtually pushed the private sector out of the foreign currency (FX) market by walking about with briefcases full of dollars at any rate they can find.
Dr. Muda Yusuf, an economist and former director-general of the Lagos Chamber of Commerce and Industry (LCCI), believes that private sector operators lack the financial resources to compete with politicians’ war chests. Today, the black market exchange premium has extended to close to N200 per dollar, the worst level in the naira’s history.
This margin, according to experts, is a deterrent to international investors, who must sell their imported dollars at the Investors’ and Exporters’ (I&E) window, where they will receive an average of N415/$, a rate they rarely receive while repatriating profits. About two years ago, the Central Bank of Nigeria (CBN) considered a rate convergence program to deal with the fallout from the massive arbitrage. However, this has stayed at the level of a strategy.
Perhaps the country’s most important source of foreign exchange – capital importation – is under threat due to historical rigidity in the FX management process, as well as unfriendly investment and increased political risk. The figures are low and declining, but because to the uneven distribution of inflows, this isn’t much of a concern.
The lopsidedness of the Q1 capital inflows numbers may have indicated state governments’ hesitancy about luring foreign investment through policies and programs. Unfortunately, only five states — Anambra, Katsina, Osun, Oyo, and Lagos, as well as the Federal Capital Territory (FCT) – accounted for 71% of the total inflow.
It’s possible that this would be dismissed as white noise if it happened. However, it has merely exacerbated an alarming historical pattern. Only 13 states assumed values in the country’s capital importation data last year, compared to eight the year before.
Surprisingly, the entire oil-rich South-South is absent from the Q1 data, raising concerns about the region’s ability to attract new investment. If it hadn’t been for FCT and Katsina, the entire north would have been left out of the calculations. The point made by many who have warned about the long-term ramifications of rising insecurity, particularly in the country’s north, is that investment flow is a decreasing function of instability.
The capital asset classification is interesting in terms of where the country stands in terms of global investment flows. Foreign portfolio investment (FPI), also known as fair-weather or hot capital, accounts for 61% of the total. Otherwise, foreign direct investment (FDI) is 20%, which is what every economy needs to grow and create jobs. The rest is made up of loans and other short-term capital. It suggests that, while capital inflows have decreased dramatically, the larger issue is that the amount of money the country can put to medium- to long-term use has decreased significantly, a problem identified by David Adonri, a financial expert, as a major contributor to the country’s external reserves.
Shrinking foreign reserves is both a cause and an effect of falling capital imports. The country’s reserves fell by almost $1 billion in May alone. And there’s concern that it will go south throughout the remainder of the year, especially as political tensions rise.
A optimistic export forecast, on the other hand, could provide a reprieve. Last quarter, Nigeria’s trade balance exceeded N1 trillion for the first time since Q3 2019. However, there is little evidence on the horizon that the government would be able to rein in unrestricted imports, especially in light of dwindling production capacity and growing input costs. A robust industrial sector may be a key component in mitigating the negative effects of a weak external sector. Nigeria, unfortunately, does not appear to be ready to establish sustainable local industries, with the cost of diesel at an all-time high and power still failing.
