Improving Foreign Inflows into Economy with FX Reforms
James Emejo writes that the recent regulatory interventions in the nation’s foreign exchange segment appears to have emboldened confidence in Nigeria’s economy which has hitherto been avoided by foreign investors.
One of the biggest challenges facing the Nigerian economy is the lack of foreign direct investments (FDI) especially the non-oil inflows.
Given the country’s overreliance on oil for most the government’s revenues and in view of the uncertainties in the oil economy, FDIs are particularly crucial for the growth of the economy.
Unlike portfolio investments, with their inherent risks, even though they provide temporary succour to an economy, FDIs are a class of investments where a company or individual from one country invests in a business or project in another country, with the aim of establishing a lasting interest and control in the foreign enterprise.
These investment types remain critical source of capital, technology, and expertise for developing countries, and play a crucial role in their economic development in several ways.
Among other things, foreign investments can provide Nigeria with the much-needed access to capital, as foreign investors bring in money that can be used to finance new projects, expand existing businesses, and create jobs.
This will normally boost economic growth and increase the standard of living for people in these countries; enhance technology and knowledge and skills transfer to the local workforce among other capabilities.
However, the federal government’s failure to create a conducive environment for FDI to flourish, including an appropriate legal and regulatory framework, a stable political environment, security guarantees and a skilled workforce, has made these categories of investments elusive in recent times.
FDIs provide the needed foreign exchange needed to shore up the country’s external reserves in order to protect the Naira.
This is notwithstanding Nigeria’s position as the most populous country, and biggest economy in Africa as it continues to woos investors from time to time without meaningful progress.
The hostile investment climate characterised by insecurity, multiple taxations, and lack of infrastructure including power and skilled manpower seems a turn-off to investors.
It is not that investors don’t show interest in investing in the country but whenever they come and realise the challenging investment landscape, they are further discouraged.
• Investment announcements not back up with actions
The Nigerian Investment Promotion Commission (NIPC) periodically tracks investment interests in Nigeria.
The commission stated that it tracked investments valued at about $23.30 billion in 2021, which represented about 39 per cent increase over the $16.74 billion recorded in 2020.
The investment announcements, though not actual investments, nevertheless help to gauge confidence levels and appetite in the business environment.
The NIPC had indicated that the increase in the value of investment interests in the country further demonstrated the growing adaptation to the global ‘new normal’ after the economic disruption occasioned by the restrictions imposed to check the spread of the COVID-19 pandemic.
Although the improvement showed the growing confidence of investors in the government’s efforts to improve the national investment landscape, in the past, some of the investments tracked did crystalise but the majority of the interests shown in the Nigerian economy have not come to fruition in recent times.
According to the data tracked, Lagos, Bayelsa, Delta, Akwa Ibom and Adamawa ranked as the five leading investment destinations with $8.7 billion, $3.6 billion, $2.9 billion, $2 billion, and $1 billion respectively in 2021.
The manufacturing sector had 20 projects valued at $10.5 billion or 45 per cent of total investment prospects among others.
In the third quarter of 2021 alone, a total of $8.99 billion was tracked as investment announcements involving 33 projects spread across eight states of the federation.
• Capital inflows still sluggish
Despite the huge interest often shown by investors in the economy, actual investments are still elusive.
According to a recent report by the National Bureau of Statistics (NBS), total capital importation into the country rose by 6.78 per cent to $1.13 billion in the first quarter of the year (Q1 2023), compared to $1.06 billion in the preceding quarter.
This, however, represented a 28 per cent decline when compared with the $1.57 billion recorded in Q1 2022.
The largest capital importation during the period was received from portfolio investment, which accounted for $649.28 million, representing 57.32 per cent of total capital imported.
• Disincentives to investment
According to analysts, some of the key issues in the investment environment are related to insecurity, bad government policies and the perceived constraints of the country’s foreign exchange segment.
Reputable global financial and investment ratings agencies including the World Bank and the IMF had severally urged the government to overhaul its exchange rate policies which they believed were keeping investors at bay.
They were questions about the country’s operation of multiple exchange rates which they said were major disincentives for foreign investment.
There had been a growing agitation by both foreign and local investors for critical reform in the foreign exchange segment, particularly floating the naira and allowing market forces to determine its real value.
However, the concerns of the economic managers had been that the present economic fundamentals do not support FX unification or allow the forces of demand and supply to determine the value of the naira.
The argument was partly because Nigeria remained largely import dependent with a low industrial and export base. In essence, with the uncertainties in the oil economy, it is unable to earn enough dollars to support the naira in the event of a currency float.
Ideally, the concerns around the naira float had been largely on the supply side.
• Why FX segment matters
Essentially, a country’s foreign exchange policy remains critical for investors’ confidence as a clear and consistent policy provides stability and predictability for investors. When a country has a transparent policy framework, investors can assess and understand the rules and regulations governing foreign exchange transactions.
Stability fosters confidence as investors can make informed decisions regarding their investments without undue uncertainty or risk.
In addition, foreign exchange policies that prioritise investor protection contribute to investor confidence. This includes regulations and mechanisms to ensure the repatriation of profits and capital, fair treatment of investors, and the availability of effective legal recourse in case of disputes. In other words, investors feel more confident when they know their investments are protected and that they can freely convert and repatriate their funds.
Foreign exchange policies also need to be aligned with a country’s overall monetary and fiscal policy framework as investors seek assurance that foreign exchange policies are consistent with broader economic policies and objectives. Coordination between monetary authorities and fiscal authorities helps maintain macroeconomic stability, control inflation, and ensure sustainable economic growth.
• A new dawn
From the foregoing, it is no wonder that the recent policy changes by the Central Bank of Nigeria (CBN) in the country’s FX market had been able to cause a positive reaction from local and foreign investors.
The acting CBN Governor, Mr. Folashodun Shonubi, had recently abolished the segmentation in the foreign exchange (FX) market and collapsed all rates into the Investors and Exporters (I&E) window – to the excitement of investors and analysts.
Among other immediate reforms, the CBN under Shonubi, also announced the cessation of the RT200 Rebate and Naira4Dollar Remittance Schemes, with effect from June 30.
Both initiatives, introduced by the suspended CBN Governor, Mr. Godwin Emefiele, were launched to boost non-oil exports and diaspora remittances to encourage foreign exchange inflows into the economy.
These initiatives had been highly commended and welcomed by analysts with early positive results since they were launched.
The initiatives in the FX market also led to the devaluation of the naira as the local currency became weaker against the US dollar.
The apex bank had explained that the policy changes introduced in the country’s foreign exchange market were meant to promote transparency, liquidity and price discovery in the FX market in order to improve supply, discourage speculation, enhance customer confidence as well as ensure overall stability in the FX market.
The CBN also announced that going forward domiciliary account holders are permitted to utilize cash deposits not exceeding $10,000 per day or its equivalent via telegraphic transfer. CBN Director, Corporate Communications, Department, Dr. Isa Abdulmumin, in a statement issued after an extraordinary Bankers’ Committee meeting also said all visible and invisible transactions including medicals, school fees, BTA/PTA, airline and other remittances are eligible for the Investors’ and Exporters’ (I & E) window.
As a result, he said Deposit Money Banks (DMBs) shall ensure expeditious processing of all eligible invisible transactions on behalf of their customers using the applicable rate at the I & E window.
The central bank director pointed out that the meeting had discussed the policy implementation and implications for the banking public.
• Analysts’ views
The reforms in the FX market have continued to attract goodwill from both analysts and stakeholders including the international investors who viewed it as a step in the right direction for the economy.
Analysts particularly hailed the floating of the foreign exchange believing that issues concerning the supply side will hopefully be addressed in due course.
While admitting that the move had boosted investors’ confidence in the economy, they also warned that the reforms in the FX segment alone cannot provide all that is required to fix the economy as other issues around insecurity and multiple taxation among others needed to be addressed.
Speaking in separate interviews with THISDAY, the analysts believed that though some of the current initiatives may not produce immediate gratification as expected, they hold much promise in the long run.
Lead Economist at Wells Fargo Bank, United States of America, Dr. Emmanuel Akande, said he expected the confidence level of the investors in the Nigerian economy to grow following the FX reforms.
But he said the government needed to clear more obstacles that stand in the way of investments in the country.
Akande said, “With the floating of the Naira the true picture and status of Nigeria’s economy has come to the full glare of the investors hence, I expect the confidence level of the investors in the Nigerian economy to increase.
“Presently, the market forces determine the rate at which foreign currency is bought and sold. These market conditions help the investor to bet on the forex market direction after a critical study of the market fundamentals.”
However, he said notwithstanding the normalisation of the forex to its market forces, “Nigeria is currently experiencing a foreign exchange shock and energy shock, and the longer this shock persists the less confidence the investors would have in the economy.
“So, to encourage a continuous increase in the confident level of the investors in the Nigerian economy, it is crucial that there exists a less or lower government intervention in the market as this will give the market a quick turnaround to cool off.”
According to him, what investors look for before they invest in any economy includes good governance, security, sound economic policy (monetary and fiscal), tax policy among others.
“Resolving forex policy issues alone will not entirely solve the problem but a comprehensive policy overhaul of the spectrum of the entire economy will do the needful.
“Forex reform is one of the indicators that investors are watching and since that was done with, a nod of consideration for investing in Nigerian economy becomes imminent,” he stated.
Also, Chief Executive, Global Analytics Consulting, Mr. Tope Fasua, said quite a few of the investor clusters have actually expressed their increased confidence in the country as a result of the FX reforms.
He said some of the investors have also demanded to increase rates so they can be further incentivised, adding however that it would be dangerous to continue to increase rates.
Fasua said the country didn’t encourage foreign portfolio investors given their risks to the economy.
He said, “These guys are smart – they will come and they know what to do to work out their returns and if it works out for them, they would come and if they want to leave you can’t hold them back” adding that efforts should rather be put into attracting foreign direct investments into the country.
He also said investors are still looking out for policy consistency by the present administration.
He said issues of bribery, insecurity and harassment of investors as currently witnessed at the nation’s airports would further discourage investors and urged the government to put its house in order going forward.
He said, “We need to see salutary decisions that show it is a new day.”
On his part, Wealth Management and Business Development Consultant, Mr. Ibrahim Shelleng, also expressed confidence that the anticipated foreign exchange liquidity following the FX convergence would be achieved. But he pointed out that investors are only awaiting the outcomes of a number of key policy directives on monetary and fiscal policy.
He also noted that rates would eventually stabilise and lead to greater FDI
Shelleng said, “I think the move to unify the FX rate was a no-brainer. The markets have reacted positively and it is a sign of things to come. The stock market has rallied to a 15-year high and the valuation of banking stocks is set to improve as well.
“Also, the initial spike in rate is to be expected due to a backlog of demand and Hajj demand as well. Rates will eventually stabilize and lead to greater FDI.”
Also, speaking to THISDAY, Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, described the reforms as welcome developments, adding that their outcome may not yield the immediate desired results in the short run.
He said, “In the long run, however, these reforms are expected to derive positive outcomes. Currently, we are experiencing traction in investor confidence already manifesting in the capital market and other markets.
“We, however, need to take insecurity very seriously in order to get optimum investment benefits from these reforms.”
Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, said the reforms have begun to yield positive results already.
He said, “We have started seeing positive signs in the economy, especially the Capital market where investors’ confidence has been rekindled.
“The I & E window has also recorded significant FX transactions since the new FX policy started. The Importers & Exporters window exchange rate is also gradually converging with the black-market rate which is also a very positive sign.”
He added that “Economic experts have also asserted that the CBN is going in the right direction as regards its recent policies.
“We will wait for the outcome of the next MPC meeting as regards what the new position on interest rates,” he said.
