FX Reforms: Analyst Predicts $6.2bn Capital Importation for 2023 

Nume Ekeghe

Against the backdrop of recent Foreign Exchange management reforms by the federal governmental, analysts at Afrinvest have pegged the base case for capital importation in fiscal year 2023 at $6.2 billion.

However, the analysts said the projection is hinged upon the implementation of crucial reforms, including the unification of foreign exchange rates and a transition towards a managed float system.

They added that if the feat is attained, it would be an increase of $900 million when compared to the $5.32 billion recorded in 2022.

Afrinvest stated this in its report tagged, “Q1’2023 Capital Importation Data: Pre-election Jitters and Weak Fundamental Dampen Inflows.”

They stated: “Moving ahead, the CBN in tandem with the FG has introduced several policies to improve Nigeria’s ability to attract foreign capital and diaspora remittances. In a recent circular, the Apex bank announced the reintroduction of the naira payout option for diaspora remittances using the I&E window. 

“This alongside the collapse of the different FX windows into one window and pivot of the FX administration into a managed float, is a laudable initiative given that they are pro-market in nature. We believe these recent measures can help reverse the ugly trends of low foreign capital and remittance into the country.”

“Additionally, poor business climate stemming from weak infrastructure, policy mismatch, insecurity, and increasing poverty are some of the challenges that undermine the attractiveness of capital inflows, especially FDIs and remittances. Therefore, the introduction of policies to support business growth, increase crude oil production and diversify FX earnings would allow the CBN to reduce its reliance on capital controls to manage FX reserves and, in turn, the free flow of capital would reduce the apathy of foreign investors to Nigeria.”

“In light of recent initiatives by the new government, we maintain our base case capital importation projection of $6.2bn for FY:2023. This is hinged on the unification of FX rates and pivot to a managed float system that keep rates close to its fundamental value and less aggressive capital controls in H2:2023, ”they said.

They added that based on their data, total capital importation in Q1:2023 stood at $1.1bn, representing an increase of 6.8 per cent over the preceding quarter, “However, on a yearly basis, the inflows declined 28.0 per cent, the worst Q1 performance since 2017. 

“We attribute the decline to risk factors pertaining to the general elections and existing fundamental issues such as persistent capital control measures, multiplicity of exchange rate, high insecurity, and increasing yield in advanced economies. Disaggregating the data, Foreign Portfolio Investment (FPI) experienced a significant decline of 32.2 per cent y/y to $649.3 million. This is the lowest level seen in the past six years, on the back of decrease in inflows from money market investments (-79.6 per cent) and bonds (-2.9 per cent).”

The analysts however noted that there has been an increased investments in equities that witnessed a substantial growth of 559.5 per cent (q/q: 4,472.0 per cent), “As a result, the share of FPI in total capital inflows decreased to 57.3 per cent, compared to 60.9 per cent in Q1 2022.”