Nigeria attracted a sum of $4.89 billion as capital importation between January and November 2022, representing a 12.3% decline when compared to $5.89 billion recorded in the corresponding period of 2021.
According to the Central Bank of Nigeria (CBN), capital inflows into the Nigerian economy have been slow in recent years following the COVID-19 pandemic in 2020 and other economic doldrums.
A cursory look at the data from Nairalytics, a research website, capital inflows in Nigeria fell sharply in 2020 to $9.68 billion from $23.71 billion in 2019.
Also, the numbers dwindled further in 2021, attracting only $6.7 billion, its lowest in 5 years. 2022 numbers appear set to fall further.
Breakdown of the numbers: During the eleven months under review, $1.97 billion came into the country in form of loans, accounting for 40.2% of the total capital inflows in the review period. Compared to the corresponding period of 2021, loan inflow increased by 26.8% from $1.55 billion.
- On the other hand, foreign direct investment (FDI) declined by 27.4% year-on-year to $421.64 million, accounting for 8.6% of the capital imported.
- Also, foreign portfolio investment fell by 25.8% to $2.4 billion in the period under review compared to $3.24 billion recorded in the same period of 2021. However, FPI accounted for most of the capital imported into Nigeria at 49%.
- Further breakdown showed that equity FDI declined by 27.5% to $416.63 million while FDIs in form of other capital dropped by 19.2% year-on-year to $5.01 million.
Impact on the exchange rate: The lack of foreign inflows has had a major strain on the exchange rate in recent years. Nairametrics had reported that the naira depreciated by 23% in 2022 to close the year at N735/$1 despite starting the year at an average of N565/$1.
- In the same vein, the exchange rate grew weaker at the official Investors and Exporters window by 5.7% to close at N461.5/$1.
- In a bid to defend the local currency at the official market, the CBN continued with its regular interventions, which saw the external reserve lose $3.44 billion last year, falling below the $37 billion mark.
- The CBN was also impacted by the FX liquidity crunch in 2022 as the supply of forex in the country took a massive hit.
- Specifically, between January and September 2022, the CBN supplied a sum of $11.82 billion in FX value to the economy, falling short of the $13.16 billion it had disbursed in the same period of 2021 and even worse when compared to 2020 ($17.11 billion).
Why this matter: Capital importation is one of the major areas by which the Nigerian economy accesses foreign exchange, which is currently in high demand in the country, especially at a time when oil export earnings have been dwindling.
The ripple effect from the covid-19 pandemic, the low-interest rate environment in the first half of 2022, and exchange rate volatility have discouraged foreign investors from bringing their monies into the economy.
By implication, if inflows remain low amidst low export earnings and the continuously dwindling state of the country’s crude oil earnings, this could cause a further FX supply gap, which would pile more pressure on the local currency.