By Babajide Komolafe
From 2017 to 2019, Nigeria enjoyed a strong romance with foreign investors. During this period foreign investors injected $53 billion into the nation’s economy.
Driven by a series of foreign exchange market reforms introduced by the Central Bank of Nigeria (CBN) between 2016 and 2017, including the introduction of the Investors and Exporters (I&E) window and the Naira Denominated Forwards, foreign investment inflow or foreign capital importation into the country rose by 138.7 per cent to $12.228 billion in 2017, from $5.124 billion in 2016.
This upward trend continued in 2018 and 2019 with foreign investment rising by 38 per cent and 30 per cent respectively to $16.812 billion and $23.99 billion.
This steady flow of foreign capital helped the country to exit the economic recession of 2016, in the second quarter of 2017.
In addition, the country’s external reserves rose to over $40 billion in 2018 from below $30 billion in 2016. This led to the stable exchange rate of N360 per dollar enjoyed by the country from 2017 to 2019.
But the upward trend in foreign investment into the country reversed last year as the country recorded foreign investment of $9.7 billion, representing 59.6 per cent decline when compared to the $23.99 billion recorded in 2019.
This sharp decline, according to analysts indicates a cooling of the romance between Nigeria and foreign investors and the need for policy measures to revive the romance and reverse the negative trend.
While noting that the severe impact of the COVID-19 pandemic played a significant role in reducing foreign investment into the country last year, the analysts including the International Monetary Fund, IMF, opined that the economy cannot afford another year of lacklustre performance in foreign investment inflow, which is critical to the objective of returning to positive economic growth in 2021.
Foreign investment inflow in 2020
Data from the National Bureau of Statistics shows that foreign investment into Nigeria fell to $9.7 billion in 2020 from $23.99 billion in 2019. This represents a sharp decline of 59.65 per cent, year-on-year (y/y) decline.
A breakdown of the $9.7 billion foreign investment in 2020 shows that ‘Foreign Direct Investment (FDI)’ rose by 9.1 per cent to $1.028 billion from $934.34 million in 2019. But ‘Portfolio Investment’ fell sharply by 218 per cent to $5.137 billion from $16.365 billion in 2019. A similar fate befell ‘Other Investment’, which fell by 48 per cent to $3.514 billion from $6.69 billion in 2019.
Quarterly Foreign Investment Inflow
A quarterly analysis, however, showed that foreign investment inflow fluctuated throughout the year.
In the first quarter (Q1’2020) foreign investment rose by 53.97 per cent, quarter-on-quarter (q/q) to $5.854 billion from $3.802 billion in Q4’2019.
The largest amount of foreign investment by type received in Q1’2020 was ‘Portfolio ‘Investment, which accounted for 73.61% or $4.309 billion of total capital importation, followed by ‘Other Investment’, which accounted for 22.73% or $1.330 billion of total capital, followed by ‘Foreign Direct Investment FDI’, which accounted for 3.66% or $214.25 million of total capital imported in Q1 2020.
In Q2’2020, foreign investment fell by 77 per cent to $1.295 billion, reflecting the impact of the COVID-19 of the nation’s foreign exchange market.
The largest amount of foreign investment by type in Q2’2020 was received through ‘Other Investment’, which accounted for 58.77% or $761.03 million of total capital imported, followed by ‘Portfolio Investment’, which accounted for 29.76% or $385.32 million and ‘Foreign Direct Investment’ (FDI), which accounted for 11.47% or $148.59 million of total capital imported in Q2 2020.
Foreign investment, however, rose slightly by 13 per cent, q/q, to $1.461 billion in Q3’2020.
The largest amount of foreign investment by type received in Q3’2020 was through ‘Other Investment’, which accounted for 43.75 per cent or $639.44 million of total capital importation, followed by ‘Foreign Direct Investment’ (FDI), which accounted for 28.38 per cent or $414.79 million of total capital imported, followed by ‘Portfolio Investment’ which accounted for 27.87 per cent or $407.25 million of total capital imported in Q3 2020.
But in the last quarter, Q4’2020, foreign investment fell again by 27 per cent, q/q, to $1.069 billion.
The largest amount of foreign investment by type in Q4’2020 was received through ‘Other Investment’, which accounted for 73.22% or $783.26 million of total capital importation, followed by ‘Foreign Direct Investment’ (FDI), which accounted for 23.49% or $251.27 million of total capital imported and ‘Portfolio Investment’ which accounted for 3.29% or $35.15 million of total capital imported in Q4 2020.
Why Foreign Investment fell
While there are several factors responsible for the sharp decline in foreign investment inflow in 2020, analysts cite three major factors as chief culprits.
The first major factor is the COVID-19 pandemic which triggered a flight to safety among international investors and a slump in the price of crude oil, which accounts for 90 per cent of Nigeria’s dollar earnings.
“In addition to this was the scarcity of dollars due to decline in dollar earnings and limited dollar injection by the CBN in its bid to conserve external reserves. This was a major problem for foreign portfolio investors (FPIs) trying to exit the country.
In addition to the above was the low yield on money market investment, driven by the steady decline in interest rate on treasury bills to almost zero per cent last year from about 15 per cent the previous year.
“This accounted for the 69 per cent, y/y, decline in foreign investment in ‘Money Market Instruments’ to $4.150 billion in 2020 from $13.449 billion in 2019.
Speaking in this regard, analysts at United Capital Limited, said: “The slump in oil prices – Nigeria’s main dollar flow source – discouraged FPIs from bringing in new funds.
“This was further exacerbated by the fact that most FPIs had to resort to unorthodox means to repatriate their funds while many were stuck.
“That said, we beam our focus on FPI flows in 2020 considering it constitutes a bulk of Nigeria’s foreign exchange inflows.
“Unsurprisingly, FPI flows across each instrument slumped to record lows as flows into Money market (down 69.1% y/y), Equities (down 60.1% y/y) and Bonds (down 77.4% y/y) all tanked.
“The synchronized decline was largely linked to the move by the CBN to limit its intervention in the I&E window in order to forestall the onslaught on foreign exchange reserves in the face of weakened foreign exchange inflows.
“However, this move reduced the attractiveness of the Nigerian market to FPIs.
“In addition, despite the CBN maintaining its stance to segment the money market to allow FPIs have access to juicer yields in the OMO window, lower yields in the OMO market amidst galloping inflation ensured FPIs were disinterested in Nigerian bills.
“Furthermore, the rally in the equities market was inadequate to lure foreign investors to return to the market.”
Also explaining the factors that caused the decline in foreign investment, analysts at Lagos based Afrinvest Securities Limited, said:
“We attribute the weakness in FPI inflows to the bleak external conditions and Nigeria’s currency crisis which reduced investors’ participation.
“Foreign Direct Investment (FDI) inflows was the only bright spot as it increased 10.1 per cent y/y, though still below 2014 level.
“We believe FDI weakness reflects the volatile macroeconomic environment and weak medium to long-term economic prospects.”
In addition to the scarcity of dollars and low yields on money market instruments, analysts at CardinalStone Investment and Research firm noted that the high inflation rate in Nigeria compared to what obtains in other countries, also played a role as it reduced the country’s attractiveness to foreign investors.
They stated: “ In our view, sustained unorthodox policies, foreign exchange illiquidity, and widening inflation differential makes frontier peers, like Egypt, more attractive destinations for foreign capital.”
Prospects for 2021
Speaking on the prospects for foreign investment inflow this year, Afrinvest analyst said: “We expect foreign investment to remain weak due to the weak prospects of an improvement in the external environment and the currency challenges.
“Similar to the case in 2016, the introduction of capital controls amid foreign exchange illiquidity has left foreign investors stuck in the market and made Nigeria less attractive as an investment destination.
“The wide premium between exchange rates at the parallel market and the I&E window also suggests a mispricing of the currency, which makes investors and businesses reluctant to bring in capital.”
Stressing the need for the CBN to increase yield on its treasury bills (Open Market Operations, OMO), and further adjustment of the exchange rate to enhance the country’s attractiveness to foreign investors, analysts at United Capital Plc, said: “In 2021, we expect the CBN will exhaust all tools in its arsenal to attract FPI flows before conceding to an exchange rate devaluation.
“This was obvious in the move by the CBN to raise stop rates at the last OMO auction by 475 basis points (bps) on average.
“We believe a gradual rise in rates (which would reduce the negative real return) would attract more FPI flows particularly considering major developed economies continue to maintain an accommodative monetary policy stance in keeping with the global recovery narrative.”
While also stressing the need for the CBN to adjust interest rates on treasury bills, Tessy Ezeh, Chief Executive Officer of Everdon BDC, emphasised the need for the CBN to implement policies that will not just attract but also retain foreign investment in the country.
In an interview with Vanguard, she said: “You know it is one thing to attract and another thing is to retain. So if what you are attracting is less than what you are retaining, at the end of the day, we would still end up with a deficit at the end of the year.
“So we trust that the CBN is able to attract and retain the FPIs that will come in this year.
“Economies around the world were close to a recession last year but it looks like that trend is reversing. So I am sure that we are rightly positioned to attract more FPIs this year than last year.”
One of such policies needed to retain foreign investors in the country, according to the IMF is a unified exchange rate, which it averred is crucial for the nation’s economic recovery.
In an article titled, “Five Questions About Nigeria’s Road to Recovery”, Ari Aisen, Jesmin Rahman, and Jiaxiong Yao, of the African Department of the IMF, stated: “The current system (of multiple exchange rates) creates uncertainties for the private sector because of multiple exchange rates and non-transparent rules for foreign exchange allocation.
“Unifying the various rates into one market-clearing rate would establish policy credibility. Sustained premiums in the parallel market and unmet foreign exchange demand indicate the need for further adjustment in the exchange rate to reduce the gap between supply and demand.
“An appropriately valued exchange rate and a clear exchange rate policy would also help instil confidence and private sector-led recovery. Policy clarity is also important to attract larger capital inflows, including foreign direct investments, which have dropped significantly in recent years and successful diversification.”