Analysis of the recently released data by the National Bureau of Statistics (NBS) on capital importation for Q1 2022 revealed that the total amount of foreign investment inflows into the Nigerian economy declined by 28.1% q/q and 17.5% y/y to US$1.57bn in Q1 2022 from US$2.19bn in Q4 2021 and US$1.91bn in Q1 2021.
This was expected as the Nigerian market still lacks the long-awaited catalysts, such as FX clarity, improved security profile, stable government and business policies, which typically attract foreign investments. Moreso, a pre-election year, with its many uncertainties, is not the time to expect an influx of foreign investments.
A breakdown of the Q1 data showed that the dominant portfolio investments increased contribution to the total inflows from 29.4% in Q4 2021 to 60.9% in Q1 2022, leaving other investments (29.3%) and foreign direct investments (9.9%) to plug the balance.
Notably, the q/q decrease in foreign inflows in Q1 stems from a steep decline in Other Investments (-61.2% q/q) trailed by a 56.7% q/q fall in Foreign Direct Investment while portfolio investments increased by 49.0% q/q. Foreign Portfolio Investments (FPIs) remained skewed to investment in money market instruments (64.3% of the FPIs in Q1 2022). This continues to make the economy extremely vulnerable to external factors beyond the control of policymakers.
Also, there was a sharp increase in bonds investment, rising by 575.4% q/q as equity investments dipped by 16.4% q/q. However, when compared to Q1 2021, Other Investments and Portfolio Investments declined by 40.7% y/y and 1.7% y/y, respectively.
The Nigerian market still lacks the needed catalysts to boost foreign inflows into the economy, especially as politics take the center stage, raising political risk in the country. Besides political risk, capital controls continue to undermine confidence and prevent the free flow of capital. However, the recent 150bps hike in the monetary policy rate, if it translates to a significant increase in market rates, may attract more foreign investments into the fixed income market.
That said, passive investments like portfolio investments, which remain the driver of foreign inflows into Nigeria, put the economy in a slippery position. Again, the perennial inability of over 50% of the 36 states to attract capital inflows cannot be ignored, and this has over time hindered inclusive investments across the country.
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