Nigeria’s capital inflows are poised to reach their highest level in five years, presenting a paradoxical moment for the nation. Recent data from the National Bureau of Statistics (NBS) for the first quarter of 2024 revealed a 198.1% year-on-year surge in total foreign investment inflows, amounting to $3.4 billion, the largest figure since Q1 2020.
The Foreign Portfolio Investment (FPI) category, which accounted for 61.5% of the total capital importation, witnessed remarkable growth, rising by 219.7% year-on-year to $2.1 billion. This growth was primarily driven by significant inflows into the money market, which spiked by 1,175.2%, and bonds, which increased by 39.8%. Conversely, equity investments dropped sharply by 77.8% year-on-year to $49.4 million, marking the lowest Q1 equity inflows since 2022.
This shift in investment trends can be attributed to policy changes by the Central Bank of Nigeria (CBN). The CBN’s relaxation of its yield repression strategy under new leadership has attracted portfolio investors to fixed-income instruments. During the quarter, the CBN raised the Monetary Policy Rate (MPR) by 600 basis points to 24.75%, while stop rates on Treasury Bills rose to 16.2% (90 days), 17.0% (180 days), and 21.1% (364 days).
A Mixed Bag of Opportunities and Challenges
Despite the overall increase in foreign investments, Foreign Direct Investment (FDI) climbed by only 150.4% year-on-year to $119.2 million but declined 35.2% quarter-on-quarter. This downturn was partly due to the exit of multinationals like Bayer Pharmaceuticals in January 2024, reflecting lingering challenges in the Nigerian business environment.
Another key concern lies in the significant role of Foreign Currency Loans (FCY), which accounted for 94.0% of inflows in the “Other Investments” category. FCY loans surged by 165.3% year-on-year, contributing to a 171.1% rise in this segment to $1.2 billion. While these loans provide a boost to inflows, they underscore a lack of confidence among foreign investors in committing direct investments to the country. Moreover, securing these loans at high interest rates—given Nigeria’s weak credit ratings (Fitch: B-)—poses risks of loan default, especially in the face of a challenging business environment.
Sectoral and Regional Analysis
The Banking sector emerged as the top beneficiary of capital inflows, capturing 61.2% of the total, followed by Trading (14.7%) and Production (5.7%). This marked the first time since Q1 2023 that Banking led all other sectors, bolstered by improved Open Market Operations (OMO) issuances. Trading saw inflows climb to $494.5 million, surpassing the previous high of $311.2 million recorded in Q4 2021, driven by the attractiveness of Nigeria’s exports due to the weaker Naira.
Regionally, capital inflows were concentrated in just three states: Lagos ($2.8 billion), Abuja ($593.6 million), and Ekiti ($1,275). This distribution highlights the need for reforms at the state level to create more investment-friendly environments. Subnational governments must align with federal efforts to attract investments and foster fiscal independence.
Looking Ahead
While the trajectory of capital inflows suggests a potential total of $13.5 billion for 2024, the reliance on expensive loans and the lack of substantial direct investments remain critical concerns. Additionally, the depreciated Naira (down 69.6% against the dollar over the past year) and Nigeria’s high-risk business environment continue to challenge sustainable economic growth.
Ultimately, while the uptick in capital inflows offers a glimmer of hope for Nigeria’s investment landscape, the journey ahead demands strategic reforms to reduce reliance on debt and create a more conducive environment for direct foreign investments.
