The National Bureau of Statistics last week released data on the total capital importation to the country in the first three months of the year. The report shows that the total capital flows to the economy stood at $8.48 billion in the first quarter of 2019. The figure also indicated that the first quarter figure was more than the last quarter of last year’s number by 216 percent.
The CBN said, “Total capital flows to Nigeria, from January to May 2019 stood at $14.2bn of which Foreign Direct Investment accounted for $2.87 billion, representing 20.18 percent of the total amount.
“The country continues to enjoy steady capital flows due to the prevailing stable macro-economic environment and sustained investors’ confidence in the economy,” the regulatory bank had said in the statement on June 17.
The apex bank claimed that the FDI component of the total accounted for $2.87bn in the period between January and May this year while the NBS data showed that the FDI accounted for 2.86 percent or $243.36 million of the total figure in the first three months of the year.
Ordinarily, the capital importation data released by the two government agencies ought to be cheering considering the anxiety and uncertainty created by the last general election both within and outside the country.
The days, weeks and months preceding the general election in March were akin to a nation preparing for war and as if the country would not survive after the conduct of the elections.
Politicians from both sides of the divide were heating up the polity apparently to gain support and paint the other political actors and opponents dark in the face of the electors.
Many foreign investors were expected to stay away from the country due to the intensity of the campaigns by politicians to gain the attention of both the electors and foreign governments.
Even though the results of the elections are being disputed at the tribunals by the losing side, it was instructive that the elections turned out not to be as volatile as predicted by many analysts.
The economic data released so far by the agencies of government has since shown that the impact of the tension that preceded the elections did not reflect on the economy.
First, throughout the period preceding and after the elections, the local currency did not experience either fluctuation or depreciation as the naira remained stable at all the segments of the foreign exchange markets contrary to expectations prior to the elections.
The naira traded around N360 to the dollar through the period on the parallel market and 307 per dollar on the official window.
Equally, the inflation rate at the end of the first quarter did not experience any significant change. Inflation rate stood at 11.25 percent at the end of the first quarter of the year and has slightly moved up to 11.40 percent at the end of May.
Analysing the capital importation figure as released by the NBS showed that the bulk of flows into the country came from portfolio investment or what could be regarded as hot money in the financial parlance. The Offshore Portfolio Investors imported capital stood around 56.5 percent of the total capital flow, which is $7.1 billion of the $8.48 billion total capital imported to the country in the period.
The FDIs remained abysmally low at $243 million in the period under review. Significant concern on the figure released by the statistics office is that the bulk of the inflows was invested in the fixed income segment of the money market.
The offshore investors were simply attracted by the relatively high yields on government borrowing instrument comparable to other emerging market and developed economies.
Essentially, the economy was truly not significantly benefited from the foreign investment flows into the country basically because of the concentration of the investment in money market instruments which has no direct bearing with the productive sectors of the economy.
The report also negates the claims by government officials that the increased flow of foreign investment into the country was as a result of improved investors’ confidence in the economy.
Besides, the increase importation of offshore portfolio investments into the country has a short-term benefit on the country because it helps the central bank to stabilise its currency management policy. The relative stability the naira enjoyed in the last two years or so could be partly attributed to the increased flows of portfolio investment into the country.
However, in the event of a financial crisis, the first investors to take flight from the country are usually the portfolio holders due to the ease of investment exit.
Simply put, the increased capital importation flow speaks to the high-interest rate regime in Nigeria which has more or less stifled private investment in the productive sectors and encouraged the investment of both local and foreign cash in government treasuries and debt instruments.
Confirming this trend, the CBN Monetary Policy Committee (MPC) at its last meeting in May had decried the abysmal lending habit of banks in the country.
Nigerian banks are usually regarded as some of the most reluctant lenders in major economies within its peers, with an average loan-to-deposit ratio below 60 percent.
In their personal note at the last MPC, members of the rate-setting committee noted the sustained drop in banking loans to the productive sector.
The MPC members raised concerns over the vulnerabilities in the banking industry which include high concentration and contagion risks as well as significant foreign exchange exposure.
They said many of the banks are risk-averse and would rather invest the bulk of their assets in government treasuries and fixed income because of the safety of investment and the relatively high returns on such investment.
The CBN staff report on the banking industry showed that 70 percent of the bank’s liquid assets are invested in Treasury bills and other government debt instruments. The same reason portfolio investors keep coming into the country to benefit from the attractive returns on investment in government debt.
“It is especially concerning that credit to the private sector is declining and this needs to be halted and possibly reversed to strengthen economic activity and job creation,” Edward Adamu a member of the MPC said.
The recent move by the CBN to encourage banks to lend 60 percent of their Liquid-to-deposit-ratio to the productive sectors of the economy may not have put into consideration the risk factor in the environment that keep discouraging lenders from granting loans to the private sector. Latest data on Non-Performing Loans (NPLs) in the banking industry shows that it declines to 10.95 percent in April, nevertheless, this remains higher than the five percent prudential limit.
As long as the high-interest rate regime persists, not many banks would be willing to stake their assets on lending in an environment where the rate of default is high. They would rather put the bulk of their liquid assets in government treasuries where the risk of default is near zero.
Also unhelpful is the delay by the President to appoint a cabinet that would help him drive his so-called Next Level agenda. Nigeria needs to do more in attracting foreign investment into the country; especially the FDIs and we don’t have the luxury of time on our hands.
Presently, no matter what happens to our politics and economy, many portfolio investors will continue to flock into the country as long as the yield curve on government debt instrument stays in the north while interest rates in the developed economies remain in the south.
To set the right environment for a fast-pace development of the economy, the government must move from its current lethargic approach to governance to a more purposeful and vision-driven approach.
President Muhammadu Buhari should as a matter of urgency constitute his cabinet immediately and populate it with dynamic young professionals and not weather-beaten politicians who are not able to rise above partisan politics in their formulation and execution of government policies.
A major economic restructuring should take place, to reduce the cost of governance, cut waste where necessary and ensure that tough decisions to help lift the economy are taken into consideration when policies are being formulated.
The CBN should do away with many of its off-balance sheet interventions in the economy and concentrate more on its price stability role, effective banking regulation and perfect its monetary policy measures to address many of the structural weaknesses in the financial system.
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