Global Economic Outlook (G.E.O)

Nigeria’s Capital Importation Falls, Worsening Foreign Exchange Scarcity. Vol. 93. June 13, 2022.

Dear readers, welcome to another edition of the Global Economic Outlook (G.E.O) - our weekly newsletter providing insights on the local and global economy. Today, we will be discussing Nigeria’s capital importation in the first quarter of 2022.

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Nigeria’s Capital Importation Falls, Worsening Foreign Exchange Scarcity

Capital importation refers to foreign currency inflows into a country and can be in the form of portfolio investment (debt or equity) or Foreign Direct Investment (FDI). Many economies in Africa depend on capital importation for growth and also to help in providing liquidity to the foreign exchange (FX) market. Nigeria is no exception as the country has high FX needs due to the import-dependent nature of the economy as well as a high demand for foreign goods and services.

According to the data released by the National Bureau of Statistics (NBS) for the first quarter of 2022, the capital importation into Nigeria declined in the first quarter of 2022 by 28.09% to $1.57 billion compared to the last quarter of 2021 when it was $2.19 billion. When compared to the corresponding quarter in 2021, there was a decline of 17.46% as the value then was $1.90 billion.

There are several possible reasons for the decline in the capital importation into the country and not all of them are under the control of Nigeria. Capital importation denotes investment by companies and investment involves an assessment of the risk and return. The global economy is at the moment very volatile with many economies battling the effect of the surging oil prices and other effects of the Russia-Ukraine conflict. Investors will naturally scale down on risky investments and investment in an emerging economy is typically seen as high-risk.

Other reasons that could be responsible for the decline in capital importation into Nigeria are the increasing political risk, security challenges and the difficulty in repatriation of investments. As for the increasing political risk, it is not just because of the current political situation in the country, there will certainly also be consideration for the upcoming elections in Nigeria next year.

If we break the data for the first quarter of the year down further, we will see that portfolio investment is by far the highest by type accounting for as much as 60.87% ($957.58 million) of all capital importation, followed by Other Investment with 29.28% ($460.49 million) while Foreign Direct Investment only makes up 9.85% ($154.97 million).

It is clear from the breakdown of the portfolio investment figure that investors in the Nigerian market are concerned about risk as most of the investments are in money market instruments (64.30%) which are short-term instruments. Bonds (32.38%) and Equities (3.32%) make up the balance.

By Sector, Banking and Financing accounted for about 65% of all capital importation into Nigeria in the first quarter of 2022 with production attracting only 14.22% of all funds. The agricultural sector accounted for just 0.11% while the Oil & Gas Sector performed really poorly attracting just 0.04% of all capital importation into the country. The failure of the Oil & Gas sector to attract funds might be due to the inability of the government to implement the major provisions of the Petroleum Industry Act (PIA).

The United Kingdom (UK) remains the major source of capital importation into Nigeria accounting for 64.92% in the first quarter of the year while South Africa (7.47%), United States (5.22%), Mauritius and Singapore complete the top five countries.

The dwindling capital importation into Nigeria will certainly aggravate the FX situation in the country and in fact, the effect is already being felt as there is currently low liquidity in the FX market and the rate in the parallel market has exceeded ₦600/$. It might still be some time before the level of capital importation increases again and Nigeria will need a home-made solution at least in the short term.

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The Central Bank of Nigeria (CBN) has raised the interest rate for the first time in six years. Watch this video to learn what the effects might be on individuals and businesses.

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