Forex Scarcity: Analysts Say Improved External Relations Will Boost Capital Inflow

Analysts have called on the government to work on strengthening multilateral and bilateral relationships and foster business dealings that would increase dollar inflow into the country as capital inflow into the country dipping by 32.9 per cent in the second quarter of the year.

The second quarter capital inflow into the country as released by the National Bureau of Statistics (NBS) show that inflow had declined to $1.03 billion between April and June, this year,  with portfolio investments declining significantly by 83.54 per cent as against what flowed in from portfolio investors in the first quarter of the year.

Analysts at Cowry Assets Management, in their economic flashnote, raised concerns over the depreciating dollar inflow into the country. The analysts noted that the latest data raises significant cause for concern as it represents the lowest level since Q1 of 2016, indicating systemic issues and a lack of coherent policies that are obstructing the inflow of investment into the country.

The analysts noted that, overtime, Nigeria has long grappled with macroeconomic challenges such as a weakening local currency, rising unemployment, inflation, and inadequate infrastructure.

“These persistent issues have dampened the enthusiasm of foreign investors and multinational corporations, encouraging them from making substantial investments across various sectors to drive economic growth.

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“The pipeline for capital flows remains fragmented due to persistent challenges on both the external and internal fronts. In the broader context of emerging and frontier markets, the tightening of monetary policies is driving risk-averse capital movements from developing regions to more stable ones.

“Presently, the Nigerian economy confronts several hurdles, including high inflation, a depreciating currency, and rising unemployment, creating a hostile environment for businesses and deterring foreign investors from committing their capital to the country.

“The deteriorating macroeconomic indicators have eroded the optimism of foreign investors in Nigeria. However, we believe that tangible and concerted efforts by the federal government to strengthen bilateral and multilateral business relationships, coupled with market reforms, could inspire confidence if external factors align favourably before reform fatigue sets in. In the short term, media reports suggest that the $3.0 billion sought by NNPCL from AfreximBank in an emergency loan-for-crude deal could be directed toward improving forex liquidity, which could provide some relief to the current challenges,” they pointed out.

According to the data released by the NBS, other Investment, which includes loans, trade credits, and other investments, accounted for the lion’s share at 81.28 per cent with $837.34 million, which  was largely influenced by a 146,328 per cent quarter-on-quarter increase in other claims, amounting to $65.81 million.

There was also a 77.82 per cent quarter-on-quarter surge in total loans, reaching $771.53 million. In contrast, trade credits and currency deposits saw minimal investment  during this period.

Portfolio Investment, encompassing equity investments and debt securities, comprised 10.37 per cent with $106.85 million of the total, and it faced pressure due to a significant downturn in the money market and bonds investments, exacerbating the trend of hot money exiting the market.