ANALYSIS: Capital inflows thinning-out… no lesson learnt yet

NIGERIA’s total capital inflows (otherwise called capital importation) dropped to a three-year low in the second quarter of the year (Q2 2020), tumbling to $1.3 billion, from $5.9 billion recorded in the first quarter (Q1 2020).

Capital inflows comprise foreign direct and portfolio investments shipped into the country plus foreign trade credits, loans, currency deposits and other claims recorded in favour of a country. Capital inflows are critical components of foreign exchange liquidity and injections into the gross domestic product (GDP). 

There is a strong positive correlation between capital importation and foreign currency balances of an economy. Hence, a sliding capital importation is bad news and a terrible one for the economy where market operators have a strong appetite to export capital. As uncertainty hit the global economy earlier in the year, foreign investors’ stake in Nigerian assets nosedived. It dropped to $266 million in March, the lowest since 2017 according to data from the FMDQ OTC. 

If the trade changed, it was only amplified by the increasing uncertainty in the currency market. Foreign investors have continued to pull out investments on account of the persistent depreciation of naira-denominated assets like stocks. 

And it is not only portfolio asset holders that are divesting. A few weeks ago, Tingo International struck a deal to have its Tingo-branded devices produced in China. It cited poor power supply and foreign exchange crisis as reasons. It hopes to return when the major challenges are addressed. 

In the meantime, Nigeria remains a mere market in the medium-term business model as it hopes to ship back about 92 million devices in January. This will increase the pressure on the naira and worsen the scaring unemployment figure, which is currently estimated at 27.1 per cent.

Trade deficit, trade balance sink further…

NIGERIA’s trade deficit is widening across different frontiers. While the smartphone global average sale has fallen, the International Data Corporation (IDC), a global provider of market insights on information technology, said shipments into Nigeria increased to almost three million units, up 13.7 per cent quarter-on-quarter in Q3 2020. 

In Q3 2020 also, Nigeria’s trade balance, which was positive until the fourth quarter of 2019, stood at 44.3 per cent. If the country cannot block the growing leakages, its position could only be strengthened when it attracts injections such as capital inflows. Growing leakages and dwindling injections, as Nigeria currently faces, are a double whamming 

So, falling capital inflows is not pleasant news for the economy and the naira in particular. 

Quarter-on-quarter, the inflow growth rate was -353 per cent, the worst for over a decade. It is dwarfed by the quarterly average of $6 billion and $4.2 billion recorded last year and 2018 respectively. 

Understandably, the country like other economies was neck-deep in the Covid-19 outbreak. The hope of a better Q3 2020 marched in with the news of re-opening. But two days ago, the figures poured in without the expected remarkable improvement in capital importation. The inflows moved slightly by 13 per cent to stay at $1.5 billion, which is still far less than any of the previous quarters had done.

In the first nine months of the year, Q1 lifted the capital importation to $8.6 billion, barely 43 per cent of the performance of the last year’s corresponding period. It is also slightly above half of the 2018 first three quarters. Perhaps, it is justifiably poor as the year has had to battle the threatening impacts of COVID-19 with its associated risks.

Capital importation by destinations (states) may also serve a useful guide if efforts to truly position Nigeria as the choice of investors. This year, only 10 states, the Federal Capital Territory (FCT) inclusive, have attracted capital. The recipients are Abia, FCT, Akwa Ibom, Anambra, Kaduna, Kano, Lagos, Niger, Ogun and Sokoto. Yet, only five states (FCT inclusive) received capital consistently in the three quarters. In Q3, the $1.46 billion inflows were attracted by only six states and FCT. ‘A’ class states such as Rivers, Delta and Cross Rivers had not attracted any foreign capital investment since the beginning of the year.  

And it is safe to approximate that Lagos remains the destination of all the capital importation when one weighs its share (87 per cent) with what goes to other states of the federation – a meager 13 per cent. One may also wish to question the usefulness of billions of naira state governors spend yearly scouting for foreign investments in different parts of the world. 

Covid-19 may have heightened the disproportionate nature of Nigeria’s capital inflow. But it is a near reflection of an historical trend. Whereas five states and FCT made the list in Q3 2020, eight (FCT inclusive) polled the $5.63 billion realised last year’s Q3. Lagos’ contribution then was even disproportionately higher at 93 per cent as against Q3 2020’s 83 per cent.

The foreign banks have continued to play a lead role in capital importation as shown by the Q3 2020 data released by the NBS. Standard Chartered Bank Nigeria Limited led the channels of importation analysis, followed by Citibank Nigeria Limited and Stanbic IBTC Bank Plc. The three banks got a total of 75 per cent of the business. In dollar terms, $1.1 billion was funneled through the banks. 

Troubles worsened by insecurity, poor infrastructure, policy inconsistency

EXPERTS have blamed insecurity (manifesting in rising banditry and kidnapping), poor infrastructure and unstable policies for the rising capital flight and dwindling foreign exchange earnings. Bala Zakka, an energy economist and financial analyst, says final investment decision (FID) analysis will continue to favour other competing emerging markets until “there is a drastic change in the current national economic management approach”. 

The Petroleum Industry Bill (PIB) projected as the game-changer in the oil and gas fiscal framework has been stalled for over a decade. As uncertainty continues, the international oil companies (IoCs) have continued to divest or shift fresh capital expenditure (CaPex) to Angola, Ghana and more stable competitors.

As inflows drop, exporters face Herculean tasks in their effort to ship out local commodities to earn forex. A few weeks ago, exporters raised the alarm that cargos worth over $8 billion were laying fallow at the Lagos seaports as an obstinate Central Bank of Nigeria (CBN) insists on enforcing the cumbersome Nigeria Export Proceed (NXP) number directive. As the NXP clearance becomes more cumbersome, the stake gets while rent-seeking tendency increases.    

 “We have been having issues with the NXP validation, which is a new procedure that CBN introduced. It came in so suddenly, introducing several agencies to validate the export process. First, you have the authorized dealer bank; the pre-inspection agency; the Nigeria Customs Service (NCS) and the Central Bank. All these have made the process very cumbersome.

“It is creating queues. Several containers are stranded now in the port terminals. The worst-case has to be perishable commodities. When you subject them to this kind of procedure, you will have some problems with their integrity. If cargoes remain in the containers, their quality deteriorates,” a frustrated importer and Secretary-General, National Cashew Association of Nigeria, Sotonye Anga, had lamented.     

Last week, the Ministry of Communication and New Technology issued two directives that will affect communication. First, it stopped the activation of the new Subscriber Identity Module (SIM), a policy believed to have a major impact on people visiting the country for the first time (including investors). Secondly, it ordered the linking of the Subscriber Identity Module (SIM) cards with the National Identity Number (NIN) within two weeks, a policy that may only fuel rent-seeking and further increase the country’s corruption perception. 

 Experts say Nigeria’s fiscal position can only get worse until there is a switch to policies that support trade and reduces vested interest, cronyism, rent-seeking and official corruption.