•Down 20.5% in 2022
By Chinwendu Obienyi
Following the recently published capital importation data by the National Bureau of Statistics (NBS), there is strong apprehension that market supply might reduce and there may be a drop in foreign investments.
According to the National Bureau of Statistics (NBS), capital importation into Nigeria fell 51.5 per cent year-on-year (y/y) to $1.06 billion in Q4 of 2022 as against $2.19 billion recorded in the same period of 2021. The report also showed that capital imports stood at $1.16 billion.
Compared to $1.6 billion and $1.5 billion recorded in Q1 and Q2 2022, this meant that capital importation declined for the third straight year to $5.3 billion (-20.5 per cent y/y). This is the weakest inflow since $5.1 billion recorded in 2016.
Disaggregating the data, Foreign Portfolio Investment (FPI) fell 27.9 per cent to its six-year low of $2.4 billion due to aversion to the money market (-46.3 per cent) and equity (-72.6 per cent) although investment in bonds grew 73.8 per cent. Consequently, the share of FPI in total capital inflows dipped to 45.8 per cent – the weakest since 2016 – against 50.5 per cent in 2021.
On the other hand, capital inflows from other investments fell 7.6 per cent y/y to $2.4 billion owing to a 2.8 per cent decline in loans (96.3 per cent of the sub-component). Despite the decline, the share of other investments rose to 45.4 per cent which is the highest in at least 9 years. Also, Foreign Direct Investment (FDI) fell 33.0 per cent to $468.1 million while its size in the total capital inflows dropped to 8.8 per cent from 10.4 per cent. This suggests a continued decline in foreign investors’ interest in committing to long-term investment with the potential for wealth creation and sustainable growth in Nigeria.
Across sectors, Banking (39.2 per cent), Production (17.8 per cent), and Financing (14.8 per cent) accounted for the most inflows as 8 sectors recorded growth and 12 declined. Similarly, Lagos (67.8 per cent) and Abuja (30.6 per cent) reported the lion’s share of capital inflows as only 10 states recorded inflows versus 13 in 2021. The heavy concentration in the economic and administrative capitals only highlights the poor state of sub-national economies in the country and the need to increase the attractiveness of states.
Reacting to the development, analysts said the persistent slowdown in capital importation reflects foreign investors’ lacklustre interest in the country.
According to them, the unclear foreign exchange framework, an uninspiring macro narrative, elevated global interest rates, and heightened global uncertainties are responsible for the decline.
Analysts at Cordros Capital said, “While we believe a new government will be a breather for the country in the short term as sentiments are likely to improve, we think foreign capital inflows will remain low compared to pre-COVID levels over the medium term in the absence of significant reforms in the FX, fiscal and monetary policy frameworks”.
For their own part, analysts at Afrinvest Research, said capital importation continues to weaken below its pre-Covid level ($24.0 billion), primarily due to the investors’ aversion to subsisting FX policies.
They noted that the prominence of capital controls to manage the ongoing FX crisis complicates fund repatriation from Nigeria and, by the same token, discourages new investments by offshore players.
“This point is buttressed by the abysmal foreign investors’ participation in the domestic equities market (down to 16.3 per cent in 2022 vs 22.9 per cent in 2021) underperforming pre-Covid level of 48.9 per cent. In the same vein, the existence of a multiplicity of FX windows muddles clarity around FX administration, subsidizes the government sector at the expense of the large private economy, and contributes to the widening premium of parallel market rates to the official market.
In addition, the weak capital flow cannot be delinked from the broader pressure on flows to emerging and frontier markets amid the normalisation of monetary policy in Advanced Economies (AEs). Furthermore, we opine that the poor business climate stemming from weak infrastructure, unsupportive policies, insecurity, and increasing poverty are some of the challenges that undermine the performance of capital inflows, especially FDIs. Therefore, measures that can help reverse ugly trends include the introduction of policies to support diaspora remittances, enhance crude oil production and diversify FX earnings. These policies would allow the CBN to reduce its reliance on capital controls to manage FX reserves and, in turn, the free flow of capital would reduce the apathy of foreign investors to the domestic market”, they said.
They further noted that the issue of multiple FX windows should be addressed while the business environment should be enhanced by investing in infrastructure and undertaking necessary reforms across key sectors of the economy.