Real capital inflows needed to solve FX crisis, not rate hikes – Economists

Nigeria needs more foreign capital inflows, not continuous rate hikes, to solve its unending FX crisis that has put the country’s economy on ghost mode for potential investors, economists polled by BusinessDay have said.

“You can only have investments streaming in if FX is stable and its stability is on the account of more foreign direct investment (FDIs),” Tajudeen Ibrahim, director of research and strategy at Lagos-based Chapel Hill Denham, an investment bank said.

In the last one year, the Nigerian naira has tumbled, losing more than 70 percent of its value, following the unification of the exchange rate and the floatation of the local unit last June.

Data from FMDQ Securities Exchange Limited shows that the naira plummeted to a low of N1,635.15 at the official foreign exchange (FX) market on Monday. It suffered a depreciation of 0.24 percent against the dollar, compared to the N1,631.21 rate recorded on Friday.

The Nigerian government has been responding to the continued slide in the naira by wooing investors to the country. But this is yet to have a considerable impact on the local currency which was listed among the top ten worst currencies in the world by Bloomberg.

On its part, the Central Bank of Nigeria (CBN) has raised benchmark interest rates for the fifth straight time by a total of 850 basis points to 27.25 percent within a year in a bid to rein in inflation and shore up the value of the battered naira.

But this is yet to change the fortune of either the consumer prices which its recent two months slowing was majorly driven by the high base effect and a reduction in food inflation or the naira which fell to a low of 1,685.48/$ the very day rate was hiked by a 50 bps.

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“Countries that are succeeding in having effective monetary policy have sufficient reserves to make capital look immobile and exchange rate inflexible. If we don’t do that, whatever is done is in vain,” Ayo Teriba, CEO of Lagos-based consulting firm, Economic Associates.

“In the face of volatile exchange rate and capital mobility, domestic monetary instruments will not be effective,” Teriba added.

Nigeria’s reserves inadequate to restore the value of the naira

Nigeria has low external reserves relative to its economy and this has been the reason why the naira is weak and may continue to remain so, according to Teriba who is a member of the Ministry of Finance Incorporated (MOFI).

Data obtained from the CBN revealed that Nigeria had $33.4 billion in reserves as of when President Bola Tinubu’s administration came into office but rose to $37 billion as of the last day of September 2024.

“The country’s reserves at $37 billion is ‘very little’ for an economy of about $350 billion. That’s the reason why the naira is weak. We need to shore up the reserves to $50 to $60 billion if we want the naira to be stable,” Teriba said.

“Reserves being low shows capital mobility,” he added.

Michael Adeyemi, a Lagos-based economist, expressed skepticism about the actual value of the reserves, explaining that FX reserves under the previous administration were not as high as $37 billion yet the naira was not this low.

“I think the CBN is not completely honest with the data. If a country’s external reserves are growing, we should see its effects on the exchange rate,” the university lecturer said.

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Nigeria needs ‘massive’ actual FDIs not pledges

Analysts have said Nigeria’s economy can in no time turn the corner if the government can drive in more inflows in terms of actual foreign direct investment (FDIs) adding that this will shore up reserves and allow FX stability.

“The only opportunity Nigeria has to shore up its reserves is capital inflows. Foreign direct investment inflows and diaspora remittances are needed for real growth,” Teriba, quoted earlier, said.

He stated that there are no countries in the world that rely solely on export earnings for their dollar liquidity because global exports have become stagnant and a bit declining.

The renowned economist noted that while only India has the highest diaspora remittances in the world, Nigeria can leverage on attracting ‘massive’ inflows of FDIs not commitments, to boost the value of its embattled naira.

“If we attract enough inflows, interest rates will come down, exchange rates will become stable and inflation will fall. The central bank would not have to raise rates again,” Teriba stated.

“So far, what has the monetary policy rate done? Inflation is even higher now than when they started raising rates in February,” he said.