Pulling in Foreign Investments

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Introduction of the Investors Export Foreign Exchange Windows (IEFX) in late April 2017 is arguably the most important policy implemented by the CBN in 2017. Prior to the introduction of the IEFX, foreign portfolio investors, particularly those repatriating funds from Nigeria, were concerned about the multiple exchange rates in the country. There was a huge gap between the official exchange rate and the parallel market exchange rate, plus an opaqueness in the foreign exchange management system (which caused uncertainty), and the acute scarcity of hard currency. Consequently, there was an exodus of foreign capital and little or no new investments into the country.

Graphic2Fortunately, foreign portfolio investors are returning with the opening of the IEFX. Prior to this, investors were of the view that the naira was overvalued and not at a market-determined level. The IEFX window, higher oil prices and production, and the CBN’s consistent intervention in the forex market are the main drivers of the stability and the convergence of exchange rates in Nigeria today.

The graph below shows how the IEFX window has gained traction since it was introduced.

The capital importation graph shows that there was capital flight in Nigeria from Q2’15 which preceded the recession. The hemorrhage was stopped briefly in Q3’17 when the CBN increased the benchmark interest rate by 200bps to 14.00 percent pa. The Q3’17 figures show investors’ response to the introduction of the IEFX. There were expectations that the upward trend in capital importation will continue in Q4’17. While FPI and other investments seem to be on an upward trend, FDI has remained stubbornly low because of infrastructural as well as other institutional challenges.

 According to the National Bureau of Statistics (NBS), FDIs in Nigeria increased by $798.35 million in the third quarter of 2017. Foreign Direct Investment in Nigeria averaged $1317.76 Million from 2007 until 2017, reaching an all-time high of $3084.90 million in the fourth quarter of 2012 and a record low of $501.83 million in the fourth quarter of 2015.

Graphic3 The total value of capital importation in the second quarter of 2017 was estimated at $1.792 billion.  The amount represents some $884.1 million increase over the level in the first quarter of the year and in percentage terms, showed a growth of 95.02 per cent.

This, analysts pointed out, might be a sign of good things to come and an indication of early recovery from the quagmire the economy had been enmeshed for several months. The development signalled Nigeria’s exit from recession in the third quarter of last year.

Capital importation comprised three types, namely FDI, portfolio investment and other investments with each comprising various sub-categories. According to NBS, the portfolio investment was the largest component of imported capital in the second quarter, accounting for $770.5 million or 43 per cent of the total, followed by other investments, which accounted for $747.5 million or 41.7 per cent, and then FDI, which accounted for $274.4 or 15.3 per cent during the quarter.

Graphic1A year-on-year comparison of the three investment types indicated that portfolio investments increased by 128.4 per cent from the $337.3 million recorded in the second quarter of 2016. Other investments also increased by 43.6 per cent from $520.6 million reported in the corresponding  quarter of 2016, while FDI grew by 48.9 per cent from $184.3 million.

Analysts want the CBN to tweak its policies to make FDIs the biggest of the three types of capital flowing into the country. Direct investments, they say, impact the economy in more enduring ways since they help to boost the real productive sector while creating real, visible jobs.

By Pita Ochai


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August 2018