December 15, 2022/United Capital Research
Every economy requires a healthy level of foreign trade and capital inflows, irrespective of how autarkic it is. In a previous publication last week, we gave insights on the Q3-2022 Foreign Trade Statistics, and expectations. The purpose of this insight is merely to outline briefly the factors affecting capital flows and to what extent Nigeria’s economic development is dependent upon foreign capital. This is as we anticipate the release of the Q3-2022 Capital Importation Report by the Nigerian Bureau of Statistics (NBS).
Generally, capital inflows are on the decline. According to the Q2-2022 release, capital importation was down 2.4% q/q to register at $1.5bn, albeit 75.3% higher than its $875.6mn print in Q2-2021. The year-on-year increase was due to the low base from 2021. For context, the World Bank’s International Debt Report disclosed a deceleration in Nigeria’s Foreign Direct Investment (FDI), a component of Capital imports, from $6.0bn in 2010 to $2.4bn in 2021. Several considerations come to bear. The increased operational costs of manufacturing and processing plants reduce profitability and thus dissuade investment. Foreign exchange liquidity concerns remain as well as an increasingly poor population. Additional legacy bottlenecks such as decrepit infrastructure, policy flipflop, rising insecurity, and unabating government bureaucracies have discouraged long term foreign capital. On the Foreign Portfolio Inflows (FPI) side, investors remain discouraged on the back of hawkish monetary policy in advanced economies, negative real rate of return in Nigeria, rising election tensions and the earlier mentioned FX concerns.
Looking forward, we expect capital importation to remain broadly weak. Lack of a transparent & liquid FX regime, weak macroeconomic fundamentals, worsening debt situation and rising political risks are all issues that will limit FPI flows over the medium to long term. For FDI flows, a radical change in Nigeria’s macroeconomic fundamentals, ease of doing business, policy formulation, and wealth of the mass market must improve dramatically over the next three – five years to witness sustained improvement. Overall, we believe the possibility for this turnaround is limited, at least until the identity of the new President is revealed. As a result, we expect capital importation to continue to track below historical highs.
