President Bola Ahmed Tinubu’s reform of floating the Nigerian naira addresses a fundamental economic principle, but its effectiveness in attracting investment remains uncertain in terms of foreign portfolio investment (FPI) and foreign direct investment (FDI).
Experts argue that letting market forces determine the naira’s value promotes economic efficiency, but it’s not a cure-all. This approach fits the Mundell-Fleming model, which states that market-driven exchange rates boost stability; however, its success depends on carefully coordinating fiscal and monetary policies.
“This approach fits the Mundell-Fleming model, which states that market-driven exchange rates boost stability; however, its success depends on carefully coordinating fiscal and monetary policies.”
Over the past year, monetary and fiscal shocks have shaken Nigeria, contributing to the current economic downturn. In late 2022, former CBN Governor Godwin Emefiele’s currency change announcement worsened the naira’s struggles. Cash in hand suddenly became more valuable than bank deposits due to the high exchange rate. This created severe transactional problems for both the formal and informal sectors, as BusinessDay reports.
Nigeria’s economic woes deepened in mid-2023 when President Tinubu removed subsidies, sparking fiscal shocks. These policy shifts, combined with earlier monetary troubles, have pushed over 104 million Nigerians into poverty, BusinessDay reports, skyrocketing living costs—fueled by a 35.41 percent food inflation rate, 29.9 percent overall inflation, and a 5 percent unemployment spike—are to blame.
Sanusi Lamido Sanusi, former CBN governor, once commented that floating the naira in a loose monetary condition will result in inflation and devaluation of the currency.
“I keep saying that inflation and devaluation were not a cause but a consequence of excessively loose monetary conditions and a shortage of dollars. The underlying causes need to be addressed through aggressive tightening and oil revenue management,” Sanusi said.
Similarly, Muda Yusuf, the chief executive officer of the Centre for the Promotion of Private Enterprises (CPPE), told BusinessDay that the CBN ought not to completely float the naira, as this has worsened its volatility.
Yusuf further said the actions of the apex bank have seen the naira lose its core qualities, which he referred to as its “ability to serve as a store of value.”
Is floating the naira attracting foreign investment?
While Nigeria has shifted towards market-determined exchange rates, attracting foreign portfolio investment (FPI) continues to be a challenge.
Olayemi Cardoso, the CBN governor, expressed optimism about the interest of FPI in Nigeria, citing their keen interest in the country’s reforms. However, recent data from Nigerian Exchange Limited paints a different picture.
The domestic and foreign portfolio investment report reveals a concerning trend. While FPI stood at 22.72 billion naira in June 2023, when reforms were initiated, it declined to 17.48 billion naira by December. Although there was a brief surge in November, the overall FPI in 2022 was significantly higher compared to 2023, with figures reaching 195.76 billion naira in 2022 as opposed to 174.80 billion naira in 2023.
These numbers suggest that while the reform is a step in the right direction, it has yet to translate into substantial foreign investment inflows. More efforts may be needed to realise the full potential of floating the naira in attracting foreign investors.”
According to data from the Nigerian Exchange Limited (NGX), the fluctuating trend of foreign portfolio investment (FPI) in Nigeria throughout 2023 presents a complex landscape of investor sentiment.
Despite an auspicious start at $22.7 billion in June, FPI underwent a precipitous decline to $9.5 billion in July, indicating a pronounced erosion of investor confidence. Subsequent months witnessed incremental recoveries, with November notably surging to $34.8 billion.
However, December marked a regression to $17.5 billion. This pronounced volatility underscores the inherent uncertainty prevailing within Nigeria’s economic environment, potentially dissuading sustained long-term investment and emphasising the imperative for cohesive policy frameworks aimed at fortifying investor confidence and perpetuating FPI inflows.
Similarly, foreign investments in Africa’s biggest economy dropped to $654.7 million in the third quarter of 2023, the lowest level since the National Bureau of Statistics (NBS) started gathering the data in 2013.
The report by NBS showed that total capital importation into Africa’s biggest economy declined 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.
Meanwhile, Cardoso said in an interview with Arise TV that the FX situation should not be blamed on the central bank, stressing that the apex bank relies on FX inflows and has no power over them.
“This is a problem I sometimes have when many blame the central bank for the FX situation. We rely on what comes in; we don’t produce foreign exchange; all we can try to do is use that to leverage for more foreign exchange to come in, including foreign direct investments and foreign portfolio investors,” he said.
Basit Shuaib, an economist, emphasised the crucial role of stability in the forex market, stating, “One of the most important qualities of money that investors look for in the forex market is store of value.” Shuaib expressed concerns over the increased volatility of the naira in recent months, suggesting that the Central Bank of Nigeria (CBN) is endeavouring to stabilise the rate despite the challenges.
Adding to the discourse, Shuaib highlighted the intricate relationship between currency stability and foreign investment, stating, “It is a chicken and egg situation. You need chickens to produce eggs, and you need the eggs to hatch to become chickens. Similarly, you need more inflows to stabilise the naira, and you need a stable currency to make it attractive to investors.”
Idris Oyekan, an investment analyst, echoed Shuaib’s sentiments, noting that foreign portfolio investment (FPI) may be deterred by currency volatility. He underscored the significance of the CBN’s intervention in maintaining the naira’s value, acknowledging the challenges posed by limited resources.
Contrary to claims of a pure free-float exchange rate regime, experts pointed out that countries like the United States, Canada, and Australia operate under relatively free-floating exchange rate systems. However, they emphasised that even in these countries, occasional interventions occur to address excessive volatility or meet policy objectives.
“Some countries may adopt a managed float regime, where the central bank allows the currency to float freely most of the time but intervenes as needed to stabilise the exchange rate,” noted experts and The Professional Update Forum.
Experts stressed the importance of considering practical constraints and policy choices when assessing exchange rate regimes, highlighting the need for a nuanced understanding of the complexities involved in maintaining currency stability.
Oluwatobi Ojabello, senior economic analyst at BusinessDay, holds a BSc and an MSc in Economics as well as a PhD (in view) in Economics (Covenant, Ota).
Wasiu Alli is a business and finance journalist at BusinessDay who writes about the economy, business trends, and politics. He holds a BA. Ed. and M. Ed. in English Language and
