Hopes for Naira Stability, Job Creation with Improved Capital Importation

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James Emejo writes on the macroeconomic impact of the rebound in foreign capital importation in the third quarter of the year, having been unusually low in previous quarters
In a development suggesting a gradual build-up of confidence in the Nigerian economy, the total value of capital imported into the country rose by 74.84 per cent to $1.82 billion in the third quarter of the year, but represented a drop of 33.70 per cent relative to the third quarter of 2015, according to the National Bureau of Statistics (NBS).
The Nigerian Capital Importation, Third Quarter 2016 report had affirmed that 34 various countries actively participated in investing in the country in the period under review, with the United Kingdom accounting for the largest capital import at $1.09 billion or 60.24 per cent of the total investment.
The United States was second at $426.98 million, or 23.43 per cent of the total capital importation while the Netherlands accounted for $94.44 million, or 5.18 per cent of the total value.
According to the NBS, though the quarterly increase in the value of capital importation came largely from debt financing, the three countries put together accounted for almost nine-tenths of total capital imported into Nigeria.
Capital inflows had declined following the rejection of the monetary authorities to heed the call from international bodies particularly the International Monetary Fund (IMF) for the devaluation of the naira as a way to resolve exchange rate volatility and woo foreign investors.
Also, the delay by the present administration to produce an economic blueprint to guide investor decisions partly held back inflows.
However, the recent liberalisation of the foreign exchange market by the Central Bank of Nigeria (CBN) and adoption of a more flexible exchange rate regime appeared to be paying off following increases in capital inflows.
However, of the total quarterly increase, 85 per cent accounted for increases in portfolio investment in bonds and money market instruments, the latter of which comprises short-term funding securities including treasury bills and commercial bills from the Central Bank of Nigeria (CBN).
Quarterly growth in foreign direct investment (FDI) equity was also strong, although portfolio equity continued to decline. FDIs have longer term interests, and are therefore less likely to reflect short-term challenges than portfolio equity, according to the statistical agency.
In Q3 however, portfolio investment accounted for largest component of imported capital at $920.32 million, or 50.51 per cent of total capital imported.
Although portfolio equity declined by 28.12 per cent relative to the previous quarter, this is outweighed by large increases in other types of portfolio investment.
Speaking in an interview with THISDAY on implications of the rise in inflows in the period under review, Executive Director, Corporate Finance, BGL Capital Limited, Mr. Femi Ademola, said though it is a welcome development, the large portion of portfolio inflows must be monitored closely as they could be disruptive in the long run.
He noted: “When there is an increase in capital importation, it is usually good for exchange rate management since it increases the potential supply of foreign exchange to the country. This may also indicate the attraction of the country to foreign investors for various reasons.
“However, it would be desirable to know the purpose for the inflows to know the real import and the opportunities they portend. Hot monies would be temporarily good but it has the potential of disrupting the macroeconomic system in a sudden reversal however, long and more direct investments are very beneficial to the economy.”
Also, Economist and ex-banker, Dr. Chijioke Ekechukwu, said the development meant well for the economy.
According to him, “With the level of devaluation of our currency, it is expected that capital importation will continue to grow. Devaluation promotes export of goods and services. This is so because it will be more profitable and enduring to be an exporter during devaluation than to be an importer. Devaluation also promotes direct foreign investments, as a little foreign currency generates so much local currency in exchange.
“Diaspora Nigerians have great and valuable opportunities now to inflow their monies as they will exchange at very high local Naira currency. This is one of the reasons that countries facing recession genuinely depreciate their currencies in order to improve their balance of payment by such capital importations. It therefore portends well for the economy. The country, through the CBN, can have more available foreign currencies to fund and reduce pressure on imports.”
Economist and former acting Unity Bank Managing Director, Mr. Muhammed Rislanudenn, also described the inflows as positive news for the economy.
According to him, “Even though the value of capital importation into Nigeria in the third quarter of 2016 fell 34 per cent compared to same quarter of 2015 to $1.822 billion, it is still positive news as that figure represent over 74 per cent quarter on quarter improvement in capital importation compared to second quarter of 2016, a major improvement in foreign capital inflows since beginning of recession.
“This, may in part vindicate Central Bank of Nigeria’s decision not to reduce rates to support growth(currently -2.06 per cent) while focusing on attacking inflation (currently at 17.9 per cent) and hence incentivising foreign direct as well as portfolio investments especially in fixed income market given the high monetary policy rate of 14 per cent. The hope was for such improved capital inflows to improve dollar liquidity and allow manufacturers import critical inputs to jumpstart the economy, improve GDP growth rates and eventually reduce unemployment rate currently at 13.3 per cent. Ours is still import-dependent economy.”
Rislanudenn said, “While government should be focused on reducing dependence on imports for basic needs like food as well as export income diversification, improvement in capital importation should in the medium term support dollar liquidity and help in stabilising naira exchange rate provided the central bank deals with glaring opportunity for round tripping, arbitrage and speculative demand given the huge disparity between official and parallel market rates.”