The current build-up of the nation’s foreign reserves with a larger portion of speculative foreign capital exposes the economy to the risk of sudden withdrawals, Sanusi Lamido Sanusi, governor, Central Bank of Nigeria has warned.
Also, the concentration of the foreign capital in equities and bonds, at the expense of foreign direct investments (FDI), which have the potential for sustainable economic growth, portends danger for the economy and the nation’s capital market, which is reputed to be the largest of the frontier markets in the sub-saharan Africa.
Consequently, the Central Bank of Nigeria (CBN) and the Federal Government have been challenged to explore ways of evolving stable fiscal and monetary policies for sustainable inflows for development.
Sanusi Lamido Sanusi, CBN governor, fired the first shot at the recent Monetary Policy Committee (MPC) meeting, when he told his colleagues there, that while recognising the fact that CBN has been able to establish stability in almost all indicators, as a result
of the tight monetary policy stance, the country should not lose sight of the inherent dangers in the policy strategy.
“While recognising the good work done in establishing stability on all fronts, we must recognise the inherent risks in the policy and strategy adopted. Reserves have grown to almost $50b as indicated, but an increasing percentage of reserve accretion comes from potentially volatile portfolio flows,” Sanusi said. He added: “In 2012 for example, out of the total capital imported of $16.6 billion, only $2 billion came in the form of FDI, compared to $11.82 billion portfolio inflows into equities and $1.66 billion into Bonds and money market instruments.”
He said that in the first two months of the year, capital importation amounted to about $4.94 billion. Out of this 72.2% was portfolio investment in the Equity market, 10.92 % in Bonds and 3.05 % in money market instruments (a total of 86.17%). Only 9.52% came in as equity FDI.It is therefore important to always bear in mind the financial stability and sustainability implications of these flows.
Ken Iwelumo, former senior vice president, Investments, and Senior Financial Advisor (Stockbroker) Bank of America/Merrill Lynch said, “The CBN should be careful how it manages speculative portion of Nigeria’s foreign exchange reserves, knowing fully well that they are subject to sudden withdrawals. The Federal Government for its part, should adopt policies that encourage long term FDI.
“The hope is that some of the speculative portion will eventually be converted into longer term FDI. It is up to the CBN and the Federal Government to come up with favourable and stable economic and fiscal policies to encourage more inflows to stay in Nigeria.”
Johnson Chukwu, managing director and chief executive officer, Cowry Asset Management limited said, “The direction of foreign capital inflows into the Nigerian economy is a reflection of the perception of risk and returns of the various segments of the economy by foreign investors.
“The Nigerian economic environment currently favours short-term investments ,as such investments are not only subject to lower risks but also earn higher returns, contrary to what obtains in other emerging economies.”
Samir Gadio, emerging market strategist, Standard Bank, London, while acknowledging the positive implications of the increase in foreign reserves since early last year, said, “However, it is worth noting that this trend reflects to a large extent ,a pickup in foreign portfolio flows on the back of supportive global liquidity conditions and attractive interest rates in Nigeria. While these foreign capital flows primarily originate from real money accounts, rather than hedge funds, as in 2006-08, there is still a risk that a hypothetical future downturn in global financial markets may lead offshore portfolio investors to exit Nigeria.
“Should this ever happen (even partially), the exchange rate will come under significant pressure, while Nigerian rates will rise considerably since foreign investors account for about 40% of short-term tradable fixed income securities.”
Chukwu further added, “To reverse this situation, the government has to substantially close the infrastructure gap, particularly the energy and transport infrastructure. There must also be concerted efforts to reduce the level of corruption, improve the legal system to ensure timely dispensation of justice, particularly commercial cases, which mostly involve contract enforcement. It is only when Nigeria has a strong and vibrant real sector that our economy will begin to enjoy stability in foreign exchange reserves.”
JOHN OMACHONU
