FPIs are exiting emerging markets for safe instruments in developed markets following the increasingly hawkish stance adopted by major central banks. Increased monetary policy normalisation and rising interest rates have seen yields soar in safer markets, causing FPIs to view the Nigerian market as less attractive and the CBN and the FGN to lose a significant source of dollar inflows. This is evidenced by a menial $1.5bn in capital importation in Q2-2022, 55.0% lower than the average from 5 years preceding 2020. Also, the continued FX scarcity and illiquidity have led to disinterest by FPIs as they do not believe they would be unable to exit the Nigerian market at will if they were to purchase Nigerian instruments. Lastly, Nigeria’s fiscal framework and government policy direction to continue fuel subsidy payments mean that any dollar inflows will be used to settle the Government’s obligations regarding subsidies before the residual amount is channeled to the federation account. The FGN has spent N2.0trn on subsidies in 2022 alone, 12.0% of the current liquid foreign reserves. 

Going forward, we have a bearish outlook for the forex situation, given the expected capital flight from the Nigerian economy. Although pump prices have increased in recent months, the FGN and petroleum bodies remain the major importer(s), which continues to weigh on dollar flows. Also, despite the CBN’s adoption of an aggressive monetary policy stance mirroring major central banks, we expect FPI flows to remain essentially floored. Lastly, flows from non-exporters and other market players will likely remain flat less the CBN relaxes its rigid FX policy windows.