Hitherto, Nigeria, Africa’s largest economy was the beautiful bride for investors across the globe as they fell upon themselves to invest in the nation’s economy. That, however, has become history as capital inflows from foreign investors hit its lowest level in the financial year 2022. The outlook for 2023 does not look bright either except the government wakes up to its responsibility of creating the atmosphere that is conducive for foreign investors to want to come back with their monies. BAMIDELE FAMOOFO writes.
Nigeria is losing out in attracting foreign investments from its key business partners like the United Kingdom, United States, Singapore, South Africa among others because the environment for business in the most populous black country in the world has grown worse at least since 2016.
Data made available by the Nigerian Bureau of Statistics and analysed by experts at Cowry Assets Management Limited, recently showed that the country recorded the least capital importation in the financial year ended December 31, 2022.
The NBS in its report revealed that the total capital inflow into Nigeria declined by 20.5 percent year- on -year to $5.33 billion in 2022 from $6.70 billion in the prior year.
While experts attributed the decrease in total capital importation in the review period to external factors like the continued tightening of the global financial condition as well as the capital control measures taken by several economies in a bid to attract further capital inflows into their economies despite the United States’ banking stress fiasco, investment analysts at Cowry Assets Management also identified internal factors which bothers on the inconsistent policies of the government in Nigeria to attract foreign investors .
For instance, the government of Nigeria has failed to implement measures to improve the business environment. Part of the areas that are of major concern to foreign investors is the poor handling of security in the country as lives of Nigerians are daily being endangered.
According to Cowry Asset, another area where the government is failing is in its inability to ensure coherence in foreign exchange policies to attract foreign investments and improve the country’s economic outlook.
Johnson Chukwu, Group Managing Director, Cowry Assets Management Limited noted that the future is not bright in terms of capital importation for the country if the government refused to take urgent steps to address its errors.
“Overall, the decline in capital inflow in Nigeria is a major concern for the economy, particularly as it could have negative effects on the exchange rate and investment climate. The Nigerian government needs to take urgent steps to address the situation,” he said.
Just like Cowry Asset, KPMG Nigeria has also expressed concerns over the nation’s dwindling capital importation, warning that it will further worsen the situation of the economy if the trend persists.
KPMG Nigeria, in a report released recently, said the Naira will be worse for it if the capital inflows continue to fall. The financial services outfit suggested that the country may also continue to struggle to attract foreign capital during the financial year 2023, unless crude oil and non-oil exports increase.
The unflattering sovereign ratings by Moody’s and Standards and Poor’s Global Ratings, high cost of doing business, weak growth and high inflation and interest rates, fiscal and monetary constraints are other factors which KPMG identified to have stalled flow of capital in the country.
KPMG also mentioned that the tense political environment that emerged after the 2023 general elections in Nigeria would not allow capital inflow in any way and might worsen the situation.
“Overall, the decline in capital inflow in Nigeria is a major concern for the economy, particularly as it could have negative effects on the exchange rate and investment climate. The Nigerian government needs to take urgent steps to address the situation”
For instance, KPMG noted that capital importation showed a persistent decline from $23.9 billion in 2019, $9.65 billion in 2020, $6.70 billion in 2021, and $5.32 billion in 2022.
Impact of dwindling capital inflow on economy
KPMG, speaking on the need to turn the tide of capital inflows into Nigeria, hinted that the country depends heavily of foreign exchange to survive.
The company noted that the continuous decline in foreign capital inflows in the presence of dwindling crude oil sales and generally poor and unstable export earnings has slowed down foreign reserves accretion and widened the foreign exchange supply gap thereby putting pressure on the exchange rate which has depreciated for the most part since 2022. Also, inadequate access to foreign exchange has constrained inputs for production, leading to higher production costs, lower revenues and slower economic growth.
The firm said that the country is currently experiencing an economic slowdown which suggested weakened consumer demand, hyperinflation, high interest rates and more volatile fiscal and monetary conditions.
“While substantial reforms may yet be done to reverse the trend of declining foreign capital in the long term, we believe that in the meantime, the country will struggle to attract increasing foreign capital for most of 2023 and struggle to keep the exchange rate from depreciating further, unless it is able to boost its crude oil and non-oil exports, especially now that oil prices are once again rising,” KPMG said.
Analysis of capital inflow in six years
From its analysis of the data from NBS, Cowry Assets noted that the decline translates to the lowest amount received in terms of total capital inflow since 2016 ($5.12 billion) and also the lowest since the pre-Covid era ($23.99 billion: 2019), with the majority of the inflow coming from portfolio investment, which printed at $2.44 billion, and the least inflow during the year emanating from foreign direct investments at $468 million.
Over the years, Nigeria’s largest source of capital importation has been through foreign portfolio investment. This source has always been driven by investments in money market instruments, which contribute around 58 percent ($1.41 billion) of the total capital inflow through the FPI, which decreased by 46.3 percent year on year from $2.61 billion in 2021.
However, the largest source of investment inflow into Nigeria is through loans, which account for more than 95 percent ($2.31 billion) of the total inflow through other investments.
Meanwhile, investment inflow through loans declined by a paltry 2.8 percent year on year from $2.38 billion last year; and then, total foreign direct investment (FDI) into Nigeria plunged to $468 million in 2022, down over $230 million from the 2021 figures. This is around 10 percent of the total FDI in 2008 ($4.8 billion) and was precipitated by the severe shortage of the dollar currency in Nigeria.
Disaggregated by sector, the banking and production sectors received the highest capital inflow during the year at $2.09 billion and $948 million, respectively. This was followed by the financial and share sectors, which printed at $791 million and $469 million, respectively. On the contrary, the consulting and brewing sectors seem to maintain their positions as bleak hubs for investors to flee. Thus, a paltry $12, 000 and $55,000 were received by the sectors in 2022 and were trailed by the transport ($1.32 million), hotel ($1.63 million), and drilling ($1.76 million) sectors.
Quarter-on-quarter performance
On the basis of quarterly analysis, total capital importation stood at $1.06 billion in the fourth quarter of 2022, falling by 51.5 percent year on year from $2.19 billion in the corresponding period of 2021. The figure also fell by 8.53 percent quarter over quarter from $1.16 billion in Q3 of 2022. In the quarter, the largest inflow of capital importation was received from other investments, which accounted for 65.17 percent ($691.23 million) of total capital imported in Q4 2022. This was followed by portfolio investment with 26.89 percent ($285.26 million) and foreign direct investment (FDI) with 7.94 percent ($84.23 million).
The total value of capital importation into Nigeria in Q3 2022 stood at US$1,159.67 million from US$1,731.37 million in Q3 2021, showing a decrease of 33.02 percent. When compared to the preceding quarter, capital importation fell by 24.47 percent from US$1,535.35 million in Q2 2022.
The largest capital importation in Q3 2022 was received through Other Investment, which accounted for 54.83 percent (US$635.87 million). This was followed by Portfolio Investment with 38.12% (US$442.08 million) and Foreign Direct Investment (FDI) with 7.05 percent (US$81.72 million). Disaggregated by Sectors, capital importation into banking had the highest in-flow of US$368.95 million, representing 31.82 percent of total capital imported in Q3 2022. This was followed by the financing sector, valued at US$314.90 million (27.15%), and capital importation in shares with US$104.58 million (9.02%). Capital Importation by Country of Origin reveals that capital from the United Kingdom ranked top in Q3 2022 with US$506.87 million, accounting for 43.71 percent. This was followed by Singapore and Hong Kong valued at US$184.86 million (15.94%) and US$106.39 million (9.17%) respectively. By Destination of Investment, Lagos state remained the top destination in Q3 2022 with US$839.71 million, accounting for 72.41 percent of total capital investment in Nigeria. This was followed by Abuja (FCT), valued at US$303.81 million (26.20%).
Categorization of Capital Importation by Banks shows that Stanbic IBTC Bank Plc ranked top in Q3 2022 with US$301.84 million (26.03%). This was followed by Citibank Nigeria Limited with US$274.19 million (23.64%) and Standard Chartered Bank Nigeria Limited with US$233.34 million (20.12%).
In Q4 2022, total capital importation into Nigeria stood at US$1,060.73 million, lower than US$2,187.63 mil-lion recorded in Q4 2021, indicating a decrease of 51.51 percent. When compared to the preceding quarter, capital importation also fell by 8.53 percent from US$1,159.67 million in Q3 2022.
The largest capital importation during the period was received from Other Investment, which accounted for 65.17percent (US$691.23 million) of total capital imported in Q4 2022. This was followed by Portfolio Investment with 26.89 percent (US$285.26 million) and Foreign Direct Investment (FDI) with 7.94 percent (US$84.23 million).
Disaggregated by Sectors, capital importation into the production sector recorded the highest inflow of US$392.54 million, representing 37.01 percent of total capital imported in Q4 2022.
This was followed by capital imported into the banking sector, valued at US$255.45 million (24.08%), and Telecoms with US$168.27 million (15.86%). Capital Importation by Country of Origin reveals that capital from the United Kingdom ranked top in Q4 2022 with US$455.24 mil-lion, accounting for 42.92 percent. This was followed by the Republic of South Africa and the United Arab Emirates valued at US$119.31 million (11.25%) and US$116.82 million (11.01%) respectively.
By Destination of Investment, Lagos state remained the top destination in Q4 2022 with US$600.54 million, accounting for 56.62 percent of total capital investment in Nigeria. This was followed by Abuja (FCT), valued at US$424.50 million (40.02%). Categorization of Capital Importation by Banks shows that Citibank Nigeria Limited ranked top in Q4 2022 with US$308.72 million (29.10%). This was followed by Standard Chartered Bank Nigeria Limited with US$232.45 million (21.91%) and Rand Merchant Bank with US$102.00 (9.62%). However, on an annual basis, capital importation was US$5,328.88 million in 2022, a decrease of 20.47 percent from US$6,700.51 million in 2021.
Why foreign investors avoid Nigeria
Foreign investors have reportedly shunned Kano, Rivers, Ogun, and 24 other Nigerian states as foreign investments fell by 20.47 per cent ($1.37bn) from $6.7bn in 2021 to $5.33bn in 2022.
This is as foreign investments in the country’s commercial capital fell by 37.94 per cent from $5.82bn to $3.61bn year-on-year. Despite this fall, Lagos attracted 67.82 per cent ($3.61bn) of the total investments in 2022.
Other states that attracted foreign direct capital in 2022 include the Federal Capital Territory ($1.63bn), Akwa-Ibom ($42.52m), Anambra ($36.97m), Ekiti ($0.51m), Ondo ($0.20m), Oyo ($3m), Plateau ($0.04m), Katsina ($0.70m), and Kogi ($2m), according to the National Bureau of Statistics ‘Nigeria’s Capital Importation’ reports for the first, second, third, and fourth quarters of 2022.
Noting the general decline in capital importation, the NBS stated in its Q4 report, “In Q4 2022, total capital importation into Nigeria stood at $1.06bn, lower than $2.19bn recorded in Q4 2021, indicating a decrease of 51.51 per cent.
“When compared to the preceding quarter, capital importation also fell by 8.53 per cent from $1.16bn in Q3 2022.”
Despite launching six economic development clusters in 2021 and prospecting investors in Egypt and Ethiopia in 2022, Ogun State was unable to attract any foreign investments in 2022.
A slowdown in oil investment ensured that Rivers and Delta states (which both attracted $1m each in 2021) did not attract any in 2022.
Other notable states that were unable to attract investment in the year under review include Kano, Kaduna, Edo, Cross River, and Imo.
Abia, Adamawa, Bauchi, Bayelsa, Benue, Borno, Ebonyi, Enugu, Gombe, Jigawa, Kebbi, Kwara, Nasarawa, Niger, Osun, Sokoto, Taraba, Yobe and Zamfara were also unable to attract investors.
In 2022, 14 Nigerian governors visited Dubai, the United Arab Emirates, to seek foreign investment according to the ICIR.
The governors included those of Abia, Niger, Sokoto, and Bayelsa States.
Commenting on state investments in Q4 2022, the NBS said, “By Destination of Investment, Lagos state remained the top destination in Q4 2022 with $600.54m, accounting for 56.62 per cent of total capital investment in Nigeria.
“This was followed by Abuja (FCT), valued at $424.50 million (40.02 per cent).”
According to the statistics body of the country, investment (capital importation) data is obtained from the Central Bank of Nigeria and includes imported physical capital, such as equipment, and financial capital importation.
These investments are divided into three main categories: foreign direct investment, portfolio investment, and other investments.
In 2022, FDI fell by 33.02 per cent y-o-y to $468.08m from $698.78m, FPI fell by 27.86 per cent y-o-y to $2.44bn from $3.39bn, and other investments which include trade credits, loans, currency deposits fell by 7.55 y-o-y to $2.42bn from $2.62bn.
Explaining inflow type in Q4 2022, the statistics body stated, “The largest capital importation during the period was received from other investment, which accounted for 65.17 per cent ($691.23m) of total capital imported in Q4 2022.
“It is extremely difficult to get people to bring in money with the current exchange rate policy because if you are bringing in money, you have to exchange it at the official window”
“This was followed by Portfolio Investment with 26.89 per cent ($285.26m) and FDI with 7.94 per cent ($84.23m).
The banking sector accounted for most of the foreign investments in the country with $2.09bn, this was followed by the production sector with $948.42m. Most of the foreign capital that flowed into Nigeria in 2022 came from the United Kingdom ($2.76bn).
Foreign inflows into Nigeria have fallen drastically over the years with inflows falling by 77.79 per cent from $23.99bn in 2019 to $5.33bn in 2022. Nigeria’s challenge with foreign investments is connected to the limited forex availability, security concerns, and structural challenges plaguing the country according to the World Bank.
In its ‘Nigeria Development Update (December 2022): Nigeria’s Choice’ report, the global bank stated that this is causing a net withdrawal of equity by foreign investors in the country.
The World Bank has said foreign direct investment in Nigeria remains low because of limited forex availability, security concerns, and other structural challenges.
It said, “Net foreign direct investment and foreign portfolio investment flows into the Nigerian economy remain low, totaling only about 1 percent of GDP.
“Net FDI inflows are negative, reflecting net withdrawals of equity by foreign investors. FDI and FPI flow into Nigeria do not compare favourably with similar economies of the world, reflecting difficulties with FX availability, security concerns, and other structural challenges in recent years.
“Low growth and slow structural transformation have contributed to this outcome — the pace of structural transformation of the domestic economy of the 2000s has not been sustained over a sufficiently long period.”
According to economists, the country’s foreign exchange policy is unfavourable to investors.
The Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Muda Yusuf, particularly noted that the Central Bank of Nigeria directive asking investors to exchange foreign currency through the official window has discouraged investors from bringing in foreign investment.
He said, “Generally the environment is not quite conducive for foreign capital inflows, and the biggest problem foreign capital inflow is our foreign exchange policy.
“It is extremely difficult to get people to bring in money with the current exchange rate policy because if you are bringing in money, you have to exchange it at the official window.
“It is the biggest bottleneck to capital importation today. That is why the bulk of the foreign investments went into shares (portfolio) because you can price the shares in dollars. You can even cleverly convert it to the rate in the parallel market.”
A professor of Economics at the University of Uyo, Akpan Ekpo, highlighted insecurity and an unstable macroeconomic environment as major factors that have contributed to the continued decline in foreign inflows.
According to him, the uncertainty surrounding Nigeria’s elections also made potential investors wary about investing in the Nigerian economy.
Ekpo stated, “It is not surprising that capital importation has dropped because the insecurity in the country is a big problem for investors. That is why you also see the FDI has dropped.
“FDI means that they will come in here, build factories, and employ people. But they will not come because of insecurity. Also, the macroeconomic environment is not conducive. We have inflation rising, and we are not sure of the foreign exchange regime because the official rate and the black market rate, the disparity is too wide.”
