The economy is not faring well. It is bogged down by huge outflows in foreign direct investments. Portfolio investments face similar crisis, as the steady decline in foreign exchange reserves, investments in equities and bond markets show. This is giving the Central Bank of Nigeria (CBN) and other stakeholders the goose pimples, reports COLLINS NWEZE.
The drop in Foreign Direct Investments(FDI) and portfolio investments is giving the government and the private sector a sleepless night. The impact of investment reversals is felt in foreign exchange reserves, investment in the equities market and bonds.
FDI is a direct investment into production or business in a country by an individual or company from another country. This is done either by buying a company in the target country or by expanding operations of an existing business. FDI is in contrast to portfolio investment which is a passive investment in the securities of another country, such as stocks and bonds.
According to the Nigerian Stock Exchange (NSE), there has been a negative spike in foreign portfolio transactions this year, with more funds moving out than coming in. The NSE’s maiden foreign investment report said total foreign outflow was N50.14 billion in January as against inflow of N39.53 billion during the period, bringing total foreign transactions to N89.67 billion.
In January, last year, foreign inflow was higher at N40.96 billion against outflow of N20.50 billion.
Also, data from the CBN showed that gross external reserves as at December 31, 2013 stood at $42.85 billion, representing a decrease of $ 0.98 billion or 2.23 per cent compared with $43.83 billion at end- December 2012. The reserves have further dipped to $38.79 billion as at March 12 after dropping by $3 billion in one month.
The reserves were at $42.77 billion on February 3, and dropped to $39.72 billion on March 3. It has further dropped to $37.8 billion in March 28. Analysts said the reserves declined as imports of fuel and foods soared.
CBN explains drop in reserves
The decrease in the reserves level was driven largely by the increased funding of the foreign exchange market in the face of intense pressure on the naira and the need to maintain stability.
CBN said the pressure on external reserves was deemed to be consistent with the seasonal annual payment of dividends to foreign investors.
Oil prices remained relatively high while production was improving, and there were signs of accretion to external reserves. The CBN also expressed concern over the sudden surge in domiciliary account balances which may offset the gains from imposing 75 per cent cash reserve ratio (CRR) on public sector funds.
It expressed concern over the continued depletion of the Excess Crude Account (ECA) which balance stood at less than $2.5 billion on January 17, this year compared with about $11.5 billion in December 2012. According to the CBN, the absence of fiscal buffers increased its reliance on portfolio flows thus, constituting the principal risk to exchange rate stability, especially with uncertainties around capital flows and oil price.
On the depletion of fiscal buffers, it decried the continuous fall in revenue from oil despite stable price of oil and production last year.
It said accretion to external reserves remained low while much of the previous savings have been depleted, thereby undermining the ability to sustain exchange rate stability. The apex bank, therefore, urged the fiscal authorities to block revenue leakages and rebuild fiscal savings needed to sustain confidence and preserve the value of the naira.
It said the reduction of the United States (US) stimulus, especially, could in addition, trigger capital flow reversals and put greater pressure on the naira exchange rate. It also expressed concern about the widening gap between the official and the Bureau De Change exchange rates, noting that this could precipitate speculation and round-tripping.
The CBN also noted that the decrease in the reserves level resulted largely from a slowdown in portfolio and FDI flows in the fourth quarter of last year resulting in an increased funding of the foreign exchange market by the CBN to stabilise the naira.
The regulator expressed concern over the continued depletion of the ECA which balance stood at less than $2.5 billion during the last Monetary Policy Committee (MPC) meeting on January 17, compared with about $11.5 billion in December 2012.
“This absence of fiscal buffers increased our reliance on portfolio flows thus, constituting the principal risk to exchange rate stability, especially with uncertainties around capital flows and oil price,” the CBN said.
Other stakeholders’ view
Emerging markets strategist at Standard Bank Group Ltd, Samir Gadio, said there is a difference between current depletion in reserves and the sharp slide in late 2008 when oil price collapsed and foreign investors pulled out. He said the difference in the current reserves erosion is that the oil price has remained robust in recent years and that capital outflows have been somewhat less extreme.
“Nevertheless, drastic steps will be required to stop or slow the erosion of foreign reserves and restore confidence in the Nigerian market. In our view, a sharp tightening of monetary and liquidity conditions is urgently required if the CBN still wants to protect current dollar/naira levels,” he said.
He said the naira to dollar rate at the interbank exchange rate appears to have found a new level in the N164 to N165 threshold, but would have probably trended higher without direct CBN dollar sales to the banks.
The CBN, he said, has intervened more proactively, and at an earlier stage even on an intra-day basis, especially as it sought to reassure the market after the change of leadership at the apex bank. The CBN has also continued to provide dollar via its Retail Dutch Auction System (RDAS) window and resumed forex exchange forward sales to reduce the immediate pressure on the currency.
The key question is obviously how long the CBN can afford to defend the recent level of the exchange rate amid a deteriorating foreign reserves reserve position. With a heavily managed currency regime, an unsustainable downward trend in foreign reserves is generally the prelude to devaluation, as a qualitative drop in confidence and positioning against the local unit eventually force the central bank to adjust the exchange rate anchor.
But Eurasia Group’s Africa Director, Philippe de Pontet, said despite the upheaval at the CBN, Nigeria’s economic fundamentals remain strong compared to other frontier markets given a relatively low debt-to-GDP ratio and budget deficit. The economy is forecast to grow around seven per cent this year.
Multiple taxation
President, Chartered Institute of Taxation of Nigeria (CITN) Mark Dike said multiple taxation is a disincentive to FDI and therefore hinders economic development. He said multiple taxation is hindering economic development and social emancipation.
“There is no doubting the fact that taxation is inevitable because it provides the resources for government to provide infrastructure for its citizens, but when taxes are severally replicated on the income of an individual, then there is a big cause for concern. For instance, some state and local governments request people to pay for registration of business premises and licence of business premises,” he said.
Dike explained that the above example is one of the same as the only difference is the change of name. He regretted that governments, unfortunately, seemed not to have the wherewithal to enforce discipline and sanctity in the tax system as it is obvious that all levels of governments today are bent on collecting any taxes, anyhow.
He said clients and policy makers have continued to look up to us in their constant search for solutions to these various taxation and fiscal policy problems.
“For instance, there had been several agitations from some quarters for an upward review of property tax. This call, though, seems good on the surface but definitely not the major solution or panacea to the problem of insufficiency of revenue or eradication of corruption which has eaten deep into the fabric of the system,” he said.
The CITN boss said the success of a unified tax system depends largely on the government’s use of tax professionals who are its members to handle their tax matters in order to eliminate quacks in the tax system.
“The regulation of the tax practice and administration in any country is necessary to discourage sharp practices. This apart, the low level of tax education among the populace has made voluntary compliance quite difficult, hence, the need to consult members of a regulatory body like the CITN for professional tax advice and guidance,” he said.
Despite these challenges, the World Bank calculates that Africa received $48.2 billion capital inflows in 2011, an increase of $8 billion, and notes that the continent remains an investment destination.
Solutions to the problem
To check this trend, the CBN is looking at possibilities on taxing FDIs and other capital transfers to check capital reversals by short-term investors.
CBN Deputy Governor, Operations, Dr. Kingsley Moghalu, said the apex bank and other emerging markets were worried over ‘Faustian bargain’ with short-term portfolio investors and, therefore, looking at explicit measures to stem capital outflows in wake of Federal Reserve’s quantitative easing programme.
Capital transfers involve the acquisition or disposal of an asset, or assets, by at least one of the parties to the transaction and are made in cash or in kind.
Moghalu’s position was obtained from a report by ‘Central Banking-Daily briefing’, a journal on Central Banks Policy, Regulation, Markets and Institutions.
The Deputy Governor told The Nation in an emailed response to enquiries that he was “looking at possible options for emerging market economies, not necessarily what Nigeria will do” to check capital reversals.
Moghalu last year said Africa needs the right skills, education to attract needed FDI. He said the continent needs to direct FDI according to their priority, not according to that of foreign investors.
He said African countries will not jump into prosperity until they have developed strong manufacturing base driven with developed information technology. He said it is only through industrilisation that the over 20 per cent unemployed rate in Africa will reduce.
