The depreciation of the naira against the dollar amid multiple exchange rates in Nigeria has left investors spooked, putting a damper on the inflow of foreign capital into the country.
The World Bank, in its latest Nigeria Development Update report, said the country would not be able to attract the desired level of foreign investments if it fails to implement a single exchange rate regime and embrace timely implementation of foreign exchange policy.
The multilateral lender said favourable external conditions such as high crude oil prices provide the country the opportunity to implement a single exchange rate that is reflective of the market dynamics.
It noted that the Central Bank of Nigeria (CBN) had taken steps to unify multiple exchange rates by adopting the Investors & Exporters Foreign Exchange (IEFX) window rate as its official exchange rate in May 2021.
“However, different windows still exist, and the parallel rate premium continues to climb, reaching 39 percent over the official IEFX rate in March 2022,” the World Bank said.
The CBN, according to the report, continues to supply FX to at least four windows, sometimes at varying rates, which are the I&E window, the secondary market intervention sales retail window, the small and medium-size enterprises window, and the window for invisibles.
Nigeria’s declining investment inflows have been attributed to the country’s inability to implement reforms that will resonate with foreign investors, making it unable to meet some of its obligations such as infrastructure development and FX market stabilisation.
According to Statista, foreign direct investments (FDI) into Nigeria tumbled by 92 percent between 2011 and 2021. In 2011, FDI into the country stood at $8.84 billion. It declined to $7.07 billion in 2012; $5.56 billion in 2013; $4.69 billion in 2014, and $3.06 billion in 2015.
FDI, however, rose in 2016 to $3.45 billion but plunged to $2.41 billion in 2017 and $0.76 billion in 2018. The FDI attracted by the country increased to $2.31 billion in 2019 and $2.39 billion in 2020 but sank to a record low of $698.8 million last year.
While Nigeria attracted $2.31 billion in 2019, India got $50.61 billion; Indonesia, $24.9 billion; Vietnam, $16.1 billion; Egypt, $9.01 billion; and the Philippines, $8.6 billion.
According to the World Bank report, the premium that exists between the official exchange rate (IEFX rate) and the parallel market rate increased from N10/$ in January 2020 to N172/$ in May 2022, due to the scarcity of the greenback.
“I think multiple exchange rates are an inefficient model and there are always leakages. If we allow the currency to free float, the market will always find an equilibrium,” said Ade Adefeko, chairman of export group at Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture. “The CBN has to build trust in the market and show that it can honour FX obligations by demonstrating and meeting FX obligations at the market rate.”
He noted that the central bank had implemented various FX rates, saying, “The regulatory body can adopt the Ghana model wherein all FX is sold to banks and purchased from the banks. It kills all circumventing inefficiencies and the market plays its role.”
The official exchange rate of the naira to the dollar depreciated from N379.5/$ in January 2021 to $415.07/$ in June 2022, while the parallel market rate weakened from N360.25/$ in January 2020 to N600/$ in June 2022.
Capital importation, another source of foreign exchange inflows into Nigeria, has maintained a volatile pattern in recent years. It fell from $9.10 billion in 2013 to $20.75 billion in 2014, $9.64 billion in 2015, and $5.12 billion in 2016.
It gradually picked up in 2017 to $12.23 billion and the momentum was sustained in 2018 when it hit $16.81 billion. The steady rise continued in 2019 when the total capital imported into the country rose to $23.99 billion.
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“A single exchange rate system boosts confidence. Investors are sure of the rate when they are coming into a country and the likely rate when exiting. Therefore, they can make projections. They will not be able to do this in a multiple exchange rate regime,” Omobola Adu, investment research analyst at Afrinvest Consulting, said.
Capital importation nosedived by 59.7 percent in 2020 to $9.66 billion. The downward trend continued in 2021 when it decreased to $6.70 billion, and at the end of the first quarter of 2022, capital importation was just $1.57 billion, which was lower by 17.5 percent than the $1.91 billion in the corresponding period in 2021.
“The CBN’s inflexible currency regime and constrained ability to intervene have left it unable to meet the demand for hard currency on time or in full. Firms and individuals often have to turn to the parallel market, where the US dollar traded for N600:US$1 in early June, a 45 percent premium on the official NAFEX rate,” the Economist Intelligence Unit said.