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Declining investment inflows add to MPC’s headache ahead Monday’s meeting

Investment flows into Nigeria, which slumped to $190 million in October 2020, should be of much concern to the Monetary Policy Committee (MPC) as rising inflation and contracting growth.

Capital importation into Nigeria, which worsened in October 2020, represents a decline by 71.4 percent when compared with $670 million in September 2020, according to data from the Central Bank of Nigeria (CBN).

Capital importation by nature of investment was dominated by portfolio investment, which accounted for 41.5 percent, followed by production/manufacturing (16.3%), financing (13.4%), trading (9.6%), and agriculture (8%).

A breakdown of capital by originating country showed that the United Kingdom took the lead with 25.3 percent, the Netherlands and Singapore accounted for 14.8 percent and 8.3 percent, respectively, of the total inflow. By destination, Lagos, Abuja and Enugu were the top recipients of the inflow at $110 million, $70 million and $10 million, respectively.

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Although the drop in the investment flows was weighty, it was a reflection of global events as evidenced in the developed economies struggling with the second wave of the COVID-19 pandemic.

The development calls for the government to hasten implementation of some of its policies targeted at attracting investments into Africa’s largest economy.

The drop in investment flows further mounts pressure on the central bank over its ability to defend the naira, as petro-dollar revenue, the nation’s major source of foreign exchange earnings, remains low.

Data from the National Bureau of Statistics (NBS) show that investment flows dropped by 74.03 percent year-on-year (yoy) to $1.5 billion in Q3 2020 from $5.6 billion in Q3 2019.

To Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited, last year was not a regular year as a lot of investments were suspended.

“Foreign investors who used to enjoy 14, 15 percent rates saw the rates came down to 7, 8 percent on Open Market Operation (OMO), and that compared favourably with what is obtainable globally. Last year was not a regular year relating capital importation, so we may just discard last year and look at what government can do to next to attract investment,” Akinwunmi said.

According to Akinwunmi, government needs to make Nigeria good investment destination to attract foreign inflow, noting, “The CBN is also working to ensure that some of the diaspora funds come into the country. A lot of people are investing in real sector and the PIB when implemented will galvanise the economy and capital flows will increase.”

A disaggregation of inflow in the review period shows that foreign direct investment (FDI) at $0.09 billion accounted for 45.8 percent of total inflow, foreign portfolio investment (FPI) at $0.10 billion accounted for 5.6 percent of total inflow, while Other Investments (OI), largely in form of loans was $0.09 billion or 48.6 percent of the total inflow.

Except for FDI, these shows declines when compared with the $0.06 billion, $0.16 billion and $0.17 billion for FDI, OI and FPI, respectively, recorded in the preceding month.

Capital inflows to emerging markets (EMs) have been gradually returning since May 2020, after witnessing a sharp exit in March 2020.

Ayodeji Ebo, senior economist/head, research/strategy, Greenwich Merchant Bank, said the dearth of capital importation to Nigeria had further put pressure on the CBN as the major source of FX had been oil. There is a need to restore confidence in the foreign investors to increase capital flows to Nigeria.

Beyond the portfolio flows, Nigeria needs significant foreign direct investment to accelerate its economic growth due to continued pressure on government revenue. More capital flows will also assure more stability in the FX and encourage foreign investments, Ebo said.

On his part, Aminu Gwadabe, president, Association of Bureaux De Change Association of Nigeria (ABCON), said Nigeria can embark on backward integration and opening up of its potentials for investors.

“Government should come up with an investment in agricultural commodity bond for investors. Let us be matching investor with specific products we can export,” Gwadabe said.

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