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Nigeria: Foreign Investors Withdraw $16 billion in Q1 2020

Foreign investors are trapped in Nigeria’s debt market as dollar liquidity dries up due to a lack of fresh inflows. Some bondholders who sold local-currency securities in March have been unable to repatriate their proceeds weeks after.

Analysis by Fitch Ratings, which quotes estimates from the International Monetary Fund (IMF) indicate that foreign investors reduced their investment portfolios in Nigeria by $15.7 billion in the first quarter of 2020.

“We expect outflows to materialize later in the year, which, alongside a significant current-account deficit and continued CBN resistance to overhauling the exchange-rate framework, will drive a fall in international reserves from $38.6 billion at end-2019 to $23.3 billion by end-2020,” the rating agency said in its analysis.

The degradation of this resource will reduce Nigeria’s import possibilities from 5 months at the end of 2019 to only 3 months at the end of the current year. Several factors have led to this situation.

The UNCTAD 2019 World Investment Report notes that, Nigeria is the third host economy for FDI in Africa, behind Egypt and Ethiopia. The country is among the most promising poles of growth in Africa and attracts numerous investors in the sector of hydrocarbon, energy, buildings etc.

In the World Bank’s 2020 edition of Doing Business Report, Nigeria ranked 131st  worldwide, for the ease of doing business. This represent a leap from 2019 edition when the country was ranked 146th. The country has improved in many subcategories of the rankings: Starting a business, Dealing with construction permits, Getting electricity, Registering property, Trading across borders, and Enforcing contracts. Nigeria appears as one of the top-10 improvers for the second time.

The effects of the oil counter-shock

Foreign investors are trapped in Nigeria’s debt market as dollar liquidity dries up due to a lack of fresh inflows. Some bondholders who sold local-currency securities in March have been unable to repatriate their proceeds weeks after.

Dollar inflows in Africa’s largest oil-producing nation have taken a hit from a plunge in crude, which account for 90% of foreign-exchange earnings.The fall in the price of this commodity as well as the decline in revenues from tourism and remittances from its diaspora have negatively impacted Nigeria’s foreign currency revenues.

Ease of doing business in Nigeria

Meanwhile, Nigeria’s main advantages are a partially privatized economy, an advantageous taxation system, significant natural resources and a low cost of labor. Nigeria has been attracting strong inflows from American companies, including giants like Uber, and Facebook, as well as Emergent Payments, and Meltwater Group. China has also been investing considerably in the country, mainly in the textile, automotive and aerospace industries.

However, the Central Bank has taken two measures in this regard. First, it slightly devalued the local currency (naira), and second, it strengthened procedures for foreign currency repatriation. The consequences of this situation will affect banks, especially those that have borrowed on the international market and need to find resources to repay their debts. The decline in foreign exchange resources may also reduce the capacity of local government to mobilize budgetary resources. This may slow down transfers under the public subsidy in the petroleum product distribution sector, which accounts for a large share of the credit granted by the banks.

The Nigerian Government has also introduced many programmes to boost FDI, notably in agriculture, exploitation and mining, oil and gas extraction, as well as in the export sectors. The Nigerian Investment Promotion Act (NIPC) was established in 1995 to promote foreign direct investment in Nigeria.
Tax incentives are granted to pioneering industries deemed beneficial for the economic development of the country and employment of its workforce (such as clothing); allowances facilitating capital investments and the deduction of interest on loans for gas companies are also planned.

In Nigeria, foreign investors receive largely the same treatment as domestic investors in Nigeria, including tax incentives. However, without strong political and policy support, and because of the unresolved challenges to investment and business in Nigeria, the ability of the NIPC to attract new investment has been limited. Factors such as widespread corruption, political instability, lack of transparency and poor quality of infrastructure are limiting the country’s FDI potential. Intense bureaucracy also curbs foreign investment.

The main investing countries in Nigeria include the USA, China, United Kingdom, the Netherlands and France.
Nigeria intends to diversify its economy away from oil by building a competitive manufacturing sector, which should facilitate integration into global value chains and boost productivity. The recent merging of trade, industry and investment under the ambit of the Federal Ministry of Industry, Trade and Investment reflects Nigeria’s intention to effectively coordinate between these three key areas to improve its trading and investment environment.

In the second quarter of 2019, Foreign Direct Investment in Nigeria increased by 909.54 USD Million. Foreign Direct Investment in Nigeria averaged 1233.61 USD Million from 2007 until 2019, reaching an all time high of 3084.90 USD Million in the fourth quarter of 2012 and a record low of 314.44 USD Million in the fourth quarter of 2018, according to the Trading Economics.

Government to diversify its economic base

The Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, has assured foreign investors in the country of the safety of their funds despite the scarcity of foreign exchange in the country due to the significant fall in the price of crude oil as a result of the coronavirus pandemic.

“In 2015 and 2016, we faced the same situation. What did we do? We called a meeting of the correspondent banks and development partners. We told them that none of them would lose their money in Nigeria.

“And I am happy that we went through that without anybody losing his money in Nigeria. We made sure those that wanted to go were able to take their monies out because things turned around and we also put in place policies that made it possible for them to take their monies out.

“We always like to support an orderly exit, but not an exit where everybody rushes to the door at the same time. If there is a fire in this room and everybody rushes to the door at the same time, I am sure the fatalities would be more than if we all go out through the door in an orderly manner; and that is what we are appealing to everybody.

“If you have Letters of Credit or dollar obligations, we are asking you to be patient. There may be some delay, but I am giving 100 per cent assurance to everybody that they would not lose a cent of their monies if they desire to take their monies out. But we are seeking the patience and understanding of everybody.”

Emefiele said COVID-19 presented Nigeria with an opportunity to reset the economy and as such there was a need for the country to prepare itself to get the manufacturing sector to work, while the banking sector would support the economy.

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