Capital Imports Decline Amid Absence Of Reforms

With capital importation into the country spiraling downwards, analysts have said the trend is expected to continue even as inflows through the Investors and Exporters(I&E) window rose in the month of March to $1.49 billion.

Data from the FMDQ showed that inflows through the window had rose by 59.2 per cent compared to $937.60 million that was recorded in February. According to the data, local inflows increased by 46.9 per cent to $1.20 billion primarily due to higher inflows from the CBN, exporters and non-bank corporates in the review period.

However, with the latest capital importation for the last quarter of 2022 showing a declining inflow, analysts say without reforms in the foreign exchange policy of the country amongst other economic reforms, the downward trend is expected to continue.

The data, which was released by the National Bureau of Statistics (NBS) last week showed that capital importation declined for the third straight year to $5.3 billion having declined by 20.5 per cent compared to $6.7 billion recorded in the previous year. Broken down quarter by quarter, the inflow progressively declined from $1.6billion in the Q1 of 2022 to $1.5 billion in Q2 to $1.2 billion in Q3 and $1.1 billion in Q4.

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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 and equity 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 year on year to $2.4 billion owing to a 2.8 per cent decline in loans. Despite the decline, the share of Other Investments rose to 45.4 per cent which is the highest in at least nine years.

Also, Foreign Direct Investment (FDI) fell 33 per cent to $468.1million 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, Production, and Financing accounted for the most inflows with 39.2, 17.8 and 14.8 percents respectively as eight sectors recorded growth and 12 declined. Non-financial activities accounted for only 37.1 per cent of total inflows with funding heavily skewed to financial services.

Commenting on the latest data, analysts at Cordros Research note that, while 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.

“We expect forex liquidity conditions to remain frail in the absence of reforms to attract US dollar inflows into the economy. The low forex liquidity conditions will also be driven by lingering global uncertainties and higher global interest rates, limiting foreign inflows to the economy. Thus, foreign investors will need some convincing actions as regards flexibility and clarity in the forex framework going forward.”

To analysts at Afrinvest West Africa, capital importation continues to weaken below its pre-Covid level,primarily due to the investors’ aversion to subsisting forex policies. “Specifically, the prominence of capital controls to manage the ongoing forex 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 which was down to 16.3 per cent in 2022 compared to 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 forex windows muddles clarity around forex 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.

“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 forex earnings. These policies would allow the CBN to reduce its reliance on capital controls to manage forex reserves and, in turn, the free flow of capital would reduce the apathy of foreign investors to the domestic market.

“Additionally, the issue of multiple forex 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,” the analysts pointed out.