CBN’s Reforms Led to Surge in Investment Inflows to Four-Year Peak

CBN’s reforms have resulted in a significant increase in investment inflows, reaching a four-year high.

There was a significant increase in foreign direct investment in Nigeria during the first quarter of 2024, reaching its highest level in the past four years. This notable surge can be primarily attributed to the implementation of effective reforms by the Central Bank of Nigeria (CBN).

The most recent capital importation report published by the National Bureau of Statistics (NBS) indicates that the total foreign investments in the country amounted to $3.38 billion during the first quarter (Q1) of 2024. This represents a significant increase of 210.2% compared to the $1.09 billion reported in the preceding quarter.

Foreign capital inflows increased by 198.1% year-over-year, rising from $1.13 billion in Q1 2023.

The harmonization of the foreign exchange rate market, resolution of forex backlogs, devaluation of the naira, and implementation of higher interest rates in response to inflationary pressures have generated favorable indications for investors, analysts says.

Portfolio investment was the highest with $2.08 billion, accounting for 61.5 percent of total capital importation in Q1. ‘Other investment’ followed, with $1.18 billion capital returned, accounting for 34.9 percent. Foreign direct investment recorded the least, with $119.2 million (3.53 percent) of total capital importation in Q1, as per the NBS report.

Upon further examination, it has been revealed that there has been a significant increase in money market instruments, which fall under the category of portfolio investment. Specifically, there was a notable growth of 592.7 percent, resulting in a rise from $231.8 million in Q4 to $1.61 billion in Q1. Furthermore, when compared to the previous year’s Q1, which stood at $125.9 million, there was an impressive increase of 1,175.2 percent.

“On the money market front, which also spiked significantly, open market operations (OMO) are the major contributors. Foreign investors were attracted to the over 25 percent yield for a carry trade in naira while managing the attendant FX risks,” Temitope Omosuyi, investment strategy manager at Afrinvest Limited, said.

He said the CBN Is projected to receive a $1 billion loan from Afrexim as part of a commodity swap agreement. This represents a portion of the $3.3 billion inflow anticipated over an extended period.

“This may have come in prior to the announcement, or the promised inflows may have been discounted to get nearly this amount in Q1, over the counter,” Omosuyi added.

In April, foreign investors resumed purchasing Nigerian stocks after a prolonged hiatus. This hiatus was initially triggered by dollar shortages and subsequently exacerbated by the apex bank’s capital controls.

The report indicates a significant increase in foreign inflows into stocks during the first quarter of this year. Specifically, these inflows amounted to N93.37 billion, marking a substantial rise compared to the N18.12 billion recorded in the corresponding period of the previous year. This represents the highest level of inflows observed in any three-month period since 2019.

“The CBN’s reforms have taken Nigeria from uninvestable only a year or so to investable this year,” a foreign portfolio manager, who invests in Africa but does not want his name in print, said.

“The settlement of the FX backlog, shift to a more market-determined exchange rate and a more credible monetary policy are proving too hard to resist for investors.”

Earlier this year, Yemi Cardoso, the esteemed governor of the Central Bank of Nigeria, disclosed during an exclusive interview with Arise TV that foreign portfolio investments (FPIs) were enthusiastic about reinvigorating their presence in the country.

“A lot of FPIs are still interested in coming back to the country. They have taken a lot of methodical interest in understanding the reforms that have taken place and seeing how it is taking the country in the right direction,” he said.

“They also see rating agencies coming out with their own conclusions, of how they see the economy of the country progressing. It validates what they are thinking,” he added.

The capital importation report indicated that the banking sector received the most significant inflows, accounting for 61.2% of the total capital imported in Q1, with a value of $2.07 billion. The trading sector followed with $494.9 million (14.7%), and the production/manufacturing sector with $191.9 million (5.68%).

Furthermore, it is important to note that the majority of capital imported during the specified timeframe originated from the United Kingdom, accounting for 53.5 percent of the total capital imported, with a value of $1.81 billion.

“This was followed by the Republic of South Africa with $582.3 million (17.3 percent) and the Cayman Islands with $186.2 million (5.52 percent),” the report noted.

Regarding state-level performance, only three out of thirty-six states reported capital inflows during the quarter. Lagos emerged as the primary destination, attracting $2.78 billion, which accounted for an impressive 82.4 percent of the total capital imported. Abuja (FCT) followed with a notable $593.6 million (17.6 percent) in capital, while Ekiti recorded a modest $0.01 million.

Stanbic IBTC Bank Plc was the recipient of the highest capital importation into Nigeria, securing $1.26 million, representing 37.2 percent of the total. Citibank Nigeria Limited followed closely with an inflow of $547.7 million, accounting for 16.2 percent, while Rand Merchant Bank Plc secured $528.7 million, representing 15.7 percent of the total capital importation.

Foreign investors are attempting to capitalize on the rise in yields, as indicated by Adeola Adenikinju, the esteemed president of the Nigerian Economic Society.

“But what we should look out for is if the inflows translate into FDI which will lead to employment and reduce poverty. FPI may not necessarily create all of that. So, we have to be careful in celebrating this,” he said.

In May 2023, President Bola Tinubu assumed the leadership of Nigeria and implemented several measures that attracted the attention of foreign investors. These actions included the elimination of the petrol subsidy and the implementation of partial FX reforms.

Shortly after assuming office, he hosted several prominent corporations, including Airtel, ExxonMobil, Shell Petroleum Development Company, and Bank of America, as part of a strategic initiative to attract investments and foster economic growth in the country.

Nevertheless, his reforms have exacerbated inflation, which is currently in double digits and at its highest level on record. The escalating inflationary pressures have diminished the purchasing power of consumers, while businesses are struggling with increased operating costs.

The National Bureau of Statistics (NBS) reported that the headline inflation rate in May 2024 reached 33.95%, marking the 17^th consecutive month of increase. This represents a slight uptick from the previous month’s rate of 33.69%.

The Nigerian economy experienced a moderate expansion in the first quarter of 2023, with the Gross Domestic Product (GDP) growing by 2.98 percent year-over-year. This growth rate represents a slight increase from the 2.3 percent recorded in the corresponding period. However, compared to the previous quarter (Q4), economic growth decelerated from 3.46 percent, indicating a slowdown in the pace of expansion.

In May, the Central Bank of Nigeria (CBN) increased its monetary policy rate by 150 basis points to 26.25 percent, marking the third consecutive rate hike. This decision was made to address inflationary pressures and support the stability of the Nigerian naira. Since February, the CBN has cumulatively raised interest rates by 750 basis points.

“The year-on-year growth makes sense given that in the first quarter of last year, we were affected by the uncertainty about currency replacement, fuel queues, and elections,” Ayo Teriba, CEO of Economist Associates, said.

“However, the tightening measures by the CBN that started in February are likely to take their toll in Q2 and subsequent quarters,” he added.

July 02, 2024