Nigerians Weigh Impact of Surging Capital Inflows Amidst Economic Challenges
Despite a significant rebound in capital flows to Nigeria, reaching a four-year high of $3.38 billion in the first quarter of 2024, concerns persist over its real impact amidst widespread economic hardships.
The influx of capital marked a staggering 198.06% increase year-on-year from $1.13 billion in Q1 2023, and a robust 210.16% quarter-on-quarter rise from $1.09 billion in Q4 2023. This surge, the highest since the pre-pandemic era of Q1 2020 ($5.85 billion), underscores improved investor sentiment amid challenges like fluctuating foreign exchange policies and local currency devaluation.
Over the past sixteen quarters, Nigeria has struggled to regain its pre-pandemic quarterly average of $5 billion in capital inflows. This struggle raises critical questions about the factors hindering sustained investment, including forex liquidity policies and broader macroeconomic difficulties.
Portfolio Investment led the charge with $2.08 billion, constituting 61.48% of total inflows. Investors capitalized on the high-interest rate environment, favoring money market instruments ($1.61 billion) and bonds ($420.8 million) for their attractive returns. Conversely, equities saw a 77.8% year-on-year decline, although a 355.7% quarter-on-quarter increase to $49.4 million offered a ray of hope.
The Central Bank of Nigeria responded to persistent inflation by raising the benchmark interest rate to 24.75% in Q1 2024 from 18.75% in 2023, boosting the appeal of fixed income investments. Meanwhile, the equities market flourished, recording a 39.8% gain fueled by robust earnings, dividends, regulatory reforms, and heightened investor interest.
Other Investments followed with $1.18 billion (35% of total inflows), propelled by a remarkable 66,806% year-on-year surge in other claims and a 165.3% rise in total loans to $30.1 million. Foreign Direct Investment also increased by 150.4% year-on-year to $119.2 million, despite a decline in equity ($119.17 million) and other capital ($10,000) investments.
The United Kingdom emerged as the largest source of inflows with $1.81 billion, trailed by South Africa ($582.3 million), Cayman Islands ($186.2 million), Mauritius ($179.6 million), and the United Arab Emirates ($101.8 million). Lagos dominated as the top investment destination with $2.78 billion, overshadowing Abuja ($593.6 million) and Ekiti State ($100,000).
While the banking sector led sectors with $2.07 billion (61.24% of total inflows), the trading sector followed with $494.93 million (14.66%), and production/manufacturing with $191.92 million (5.68%). Conversely, sectors like oil and gas and drilling faced minimal investment, with sectors like marketing, consultancy, and construction receiving modest inflows.
Amidst these developments, Nigeria grapples with soaring inflation, reaching a 28-year high of 33.95% in May 2024. The economy, plagued by reduced minimum wage amidst the rising cost of living, continues to challenge President Bola Tinubu’s economic reforms. The depreciation of the naira, named the world’s worst-performing currency in H1 2024, further underscores economic volatility.
As Nigeria navigates these challenges, the surge in capital inflows presents a mixed blessing, highlighting renewed investor confidence yet prompting deeper scrutiny of its impact amidst broader economic realities. Vigilant monitoring and potential policy adjustments will be crucial as Nigeria aims to leverage economic growth opportunities amidst regulatory reforms and market potential.