Capital inflow into Nigeria hits 11-year low despite reforms

Foreign investments into Nigeria dropped to $654.7 million in the third quarter of 2023, the lowest level since the National Bureau of Statistics (NBS) started collating the data in 2013.

This shows that Africa’s biggest economy is finding it increasingly hard to attract investments despite reforms implemented by the current administration to lure back foreign investors in a bid to boost economic growth.

The total foreign investments into the country declined for the second straight quarter by 36.5 percent to $654.7 million in Q3 from $1.03 billion in the previous quarter. It also declined on a year-on-year basis by 43.6 percent from $1.16 billion in Q3 2022, the latest data released on Friday by the NBS show.

“Other investment ranked top, accounting for 77.6 percent ($507.6 million) of total capital importation in Q3, followed by portfolio investment with 13.3 ($87.1 million) and foreign direct investment with 9.13 percent ($59.8 million),” the NBS said in the capital importation report for Q3.

A breakdown of the data shows that production/manufacturing sector recorded the highest inflow of $279.5 million, representing 42.7 percent of the total capital imported in Q3, followed by the financing sector ($127.9 million or 19.5 percent), and shares ($85.5 million or 13.1 percent).

“Capital importation during the reference period originated largely from the Netherlands with $175.62 million and recorded 26.8 percent share. This was followed by Singapore with $79.2 million (12.1 percent) and the United States with $67.0 million (10.2 percent),” the report said.

Temitope Omosuyi, investment strategy manager at Afrinvest Limited, said the data clearly show that foreign investors have not committed cash to “our commendable reform rhetoric”.

“This does not mean they are not paying attention to policy changes in the country. At least, we have received upgrades on our credit rating outlook from S&P and Moody,” he said.

He added that the country can only continue to get an avalanche of promises from foreign investors without a time frame to fulfill the investment commitment. “They want macroeconomic indicators to reflect the plethora of monetary and fiscal reforms introduced by this new administration.”

Johnson Chukwu, managing director of Cowry Asset Management Limited, said the instability in the exchange rate and lack of liquidity in the foreign exchange market is scaring away investors.

“When an investor comes into the country and there are these two elements, there is exposure to the risk of capital loss in the sense that if the return on the instrument that the investor has made is lower than the rate of devaluation, it would result in a loss. So, this is a risk that investors will not take on Nigeria,” he said.

President Bola Tinubu, who took the helm of Africa’s most populous nation in May, stoked foreign investors’ interest with some of his actions including the removal of petrol subsidy and the start of foreign exchange reforms.

A few weeks after taking office, he hosted several major companies including Airtel, ExxonMobil, Shell Petroleum Development Company and Bank of America as part of efforts to drive up investments in the country.

But his reforms have worsened inflation, currently in double-digits and at the highest level in 18 years. The rising inflationary pressures have weakened the purchasing power of consumers, even as businesses grapple with higher operating costs.

The removal of the petrol subsidy tripled the petrol price to N617 from N184, causing public transportation providers such as buses, tricycles and motorcycles to raise their fares.

The high cost of dollars and the implementation of a 7.5 percent value-added tax on diesel imports, which was suspended in September, pushed its pump price to as high as N1,200 per litre.

According to the NBS, the country’s inflation rate rose to 28.20 percent in November from 27.33 percent in the previous month.

High inflationary pressures shrunk business activity four times so far in 2023.

Data from the latest monthly Purchasing Managers’ Index (PMI) by Stanbic IBTC Bank show that the headline index dropped to the lowest in eight months of 48.0 in November from 49.1 in the previous month, marking the second straight month of contraction.

The naira has continued to depreciate against the dollar and other major foreign currencies since then.

The official exchange rate fell from N463.38/$ to N 907.11/$ as of December 29. At the parallel market, the naira depreciated to 1,205/$ from 762/$.

“There are a lot of unknown or unclear elements around the economy which would explain why you are not seeing foreign investors interested in the market,” Omobola Adu, an economist at BancTrust & Co, said.

He said the decline in capital importation will affect FX supply to the economy since it is one of the main sources of FX. “So, if that number goes down, the pressure on the naira might still be remaining, especially if other sources are not coming in as much to complement the decline in capital importation.”

Omosuyi of Afrinvest recommended that a continued improvement in the country’s macro numbers, such as sustained FX stability and external reserves, a deceleration in inflationary pressure, a healthy fiscal condition, and substantial economic growth, are central to what will bring investors to Nigeria.

“Investors are not emotional. Irrespective of our dire need for investment, sadly, investors’ attention is laser-focused on just two things: the best risk-adjusted return and the preservation of their investments (through free capital mobility),” he said.

Nigeria’s economy grew marginally in Q3 by 2.54 percent (year-on-year) from 2.51 percent in Q2 and 2.25 percent in the same period last year, according to the NBS.

In terms of share of the GDP, agriculture, and the industry sectors contributed less to the aggregate GDP in Q3 compared to the same period of 2022, while the services contributed more.

“What is happening in the FX environment is extremely critical because nobody wants to get his or her funds stuck in any environment,” said Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise.

According to him, some of the companies that exited the country did so because of what was happening within the FX space because their returns in dollars were shrinking, in addition to the inability to repatriate funds.

“Until we get the macros right, especially the FX environment, the situation with capital importation will continue to be a bit challenged,” he said.

BusinessDay reported in December that at least five multinationals announced plans to exit Nigeria in 2023. They are GlaxoSmithKline Consumer Nigeria, Equinor, Sanofi, Bolt Food and Procter & Gamble.

“The economy is shrinking and things are not right which now makes it a reason for the government to begin to look at their fiscal policies again and see how they can review them to connect with realities of today,” Femi Egbesola, national president of the Association of Small Business Owners of Nigeria, said.

“Government must be pragmatic about exciting investors and encouraging manufacturers and small and medium entreprises to grow,” he added.

The capital importation report also revealed that Lagos remained the top destination in Q3 with $308.8 million, accounting for 47.2 percent of the total capital imported into the country, followed by Abuja with $194.7 million (29.7 percent) and Abia State with $150.1 million (22.9 percent).

For banks, Stanbic IBTC, received the highest capital importation into Nigeria with $222.8 million (34.0 percent), followed by Citibank Nigeria Limited with $190.0 million (29.0 percent) and Zenith Bank with $83.0 (12.7 percent).