Declining foreign investment inflows into Nigeria may continue in the next few years, worsening a tough macroeconomic outlook fuelled by decline in government’s revenue.
Economic and investment experts at Cordros Capital said there was no hope of any significant recovery in the country’s foreign inflows due to monetary and fiscal challenges.
On the background of the report by the National Bureau of Statistics (NBS), indicating that capital importation into Nigeria declined in the second quarter of the year, analysts at Cordros Capital said foreign inflows would remain low below the pre-COVID-19 levels over the medium term.
Analysts outlined that three broad factors would continue to fuel foreign investors’ apathy and limit the potential of the country as global destination for investors.
According to them, the lack of flexibility in the foreign exchange (forex) management framework and inadequate structural reforms are major factors discouraging foreign investors from the market.
Analysts added that foreign investors might also be concerned about the atmosphere of uncertainties amid political risks as Nigeria gradually moves towards next year’s general elections.
The NBS had reported that capital importation into Nigeria dropped by 2.4 per cent to $1.54 billion in second quarter of the year compared with $1.57 billion in first quarter 2022. The NBS report showed that decline in foreign portfolio investment by 21 per cent to $757.32 million and five per cent decline in foreign direct investment to $147.16 million outweighed the 37 per cent increase in other investments; which stood at $630.87 million.
The report however showed that on a year-on-year basis, capital importation rose by 75.3 per cent, primarily driven by a low statistical base effect from the corresponding period of 2021.
“We believe the persistent slowdown in capital importation reflects foreign investors’ lacklustre interest in the country given uninspiring macro narrative, relatively lower yields on fixed income instruments and OMO bills compared to historical trends and lingering forex liquidity constraints,” Cordros Capital stated.
Provisional data from the Central Bank of Nigeria (CBN)’s monthly economic report had shown that Federal Government’s retained revenue declined by 7.2 per cent to N387.93 billion in May from N417.96 billion in April, primarily driven by a 11.8 per cent shortfall in inflow from the federation account due to the lower net oil and gas revenue. At the same time, aggregate expenditure declined by 14 per cent to N912.18 billion in May, this year compared with N1.06 trillion the previous month, due to 3.4 per cent and 46.8 per cent decline in recurrent and capital expenditure, respectively.
The naira had depreciated at the official market at the weekend as intense speculation continued to take advantage of the widening gap between the official and parallel rates.
The naira depreciated by 0.3 per cent to N431.50 per dollar at the official Investors and Exporters (I & E) window of the Central Bank of Nigeria (CBN). At the parallel market, the naira closed at N700 per dollar.
Market analysts had said the premium of about N269 per unit between the official and parallel rates was fueling more speculative trading at the foreign exchange (forex) market.
At the I & E window, total turnover rose by 2.9 per cent to $655.74 million, with trades consummated within the N417 and N447.48 per dollar band.
The naira also depreciated in most forwards transactions with the one-month, three-month and six-month forwards dropping by 1.3 per cent, 0.9 per cent and 0.3 per cent. The one-year forward contract, however, appreciated by 0.2 per cent. The one-month, three-month, six-month and one-year contracts closed weekend at N434.44 per dollar, N440.19 per dollar, N452.58 per dollar and N477.74 per dollar.
Market analysts have maintained that the $2.5 billion estimated foreign exchange demand backlog, rising dollar demand by manufacturers and retail end users are largely responsible for the naira crisis.
Global Chief Economist at Renaissance Capital (RenCap), Charles Robertson, said Nigeria is in a difficult position and need to increase its dollar earnings and other revenue to support the economy.
He said Nigeria should hike taxes, raise more revenue as the country’s position is very tough that has not been seen in three decades.
“Things are not looking pretty good for Nigeria and other emerging markets. Oil production in Nigeria has fallen so badly in the last few years and oil prices is also about falling more. We are going to see disinflationary policies coming because we are approaching recession” Robertson said.
Analysts at Cordros Capital have insisted that the apex bank might not be able to sustain its current forex rate management in the long-term.
According to analysts, although the CBN has enough liquidity to support the forex market over the short term, foreign inflows are paramount for sustained forex liquidity over the medium term.
“Considering the tepid accretion to the reserves given the low crude oil production level and elevated premium motor spirit (PMS) under-recovery costs, foreign portfolio investments (FPIs) that historically supported supply levels in the I & E window will be needed to sustain forex liquidity levels in the medium to long term,” Cordros Capital stated.
They said further adjustments in the naira-dollar peg closer to its fair value and flexibility in the exchange rate would be significant in attracting foreign inflows back to the market.