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With a significant increase in foreign currency loans (FCY), economic experts are urging the Federal Government to remain vigilant in monitoring the situation and to consider potential policy adjustments to sustain investor confidence.
Experts highlight the necessity for subnational governments to implement reforms that make their states more investment-friendly. These efforts would support the federal government’s initiatives and help achieve fiscal independence.
This call to action follows a report from the National Bureau of Statistics (NBS), which showed a remarkable 198.1% year-on-year (y/y) increase in total capital inflows, reaching $3.4 billion—the highest since the first quarter of 2020.
The report reveals that Foreign Portfolio Investment (FPI) was the largest component of total capital importation, comprising 61.5% of the total. FPI grew by 219.7% y/y to $2.1 billion, driven by substantial increases in inflows into the money market (up 1,175.2%) and bonds market (up 39.8%).
The notable surge in fixed income instruments, particularly the money market, can be attributed to the Central Bank of Nigeria’s (CBN) recent policy changes. The CBN relaxed the yield repression strategy of the previous leadership to attract portfolio investors. During the reviewed quarter, it raised the Monetary Policy Rate (MPR) by 600 basis points to 24.75%, while stop rates on the 90, 180, and 364-day NT-Bills increased to 16.2%, 17.0%, and 21.1%, respectively.
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However, the NBS report also indicated a 77.8% y/y decline in equities, dropping to $49.4 million—the lowest Q1 inflows since 2022. Simultaneously, FCY loans surged by 165.3% y/y.
Analysts at Afrinvest, a research and investment firm, warn that the increase in FCY loans signals a lack of confidence among foreign investors to invest directly in Nigeria. They stated, “Given the current high cost of capital in the global market, especially for emerging economies with weak credit ratings like Nigeria (Fitch Ratings: B-), it is likely that these FCY loans (mainly to private businesses) were secured at elevated rates. Thus, while capital importation is on track to hit a five-year high, with a current run rate suggesting $13.5 billion, this is a bittersweet moment. Nigeria cannot afford to rely on expensive loans to boost foreign investment inflows. The challenging business environment increases the risk of loan defaults for businesses using FCY loans to drive operations.”
Furthermore, the concentration of capital inflows in Lagos ($2.8 billion), Abuja ($593.6 million), and Ekiti ($1,275) underscores the need for reforms at the subnational level. These reforms should aim to make states more investment-friendly, complementing federal efforts to achieve fiscal independence.
Analysts at Cowry Research noted that while the increase in capital importation is promising, the reliance on foreign currency loans and the uneven distribution of inflows across sectors and states highlight the need for further policy attention and reform. “The rebound in total capital inflow to pre-pandemic levels is a positive sign, reflecting improved investor confidence. This necessitates vigilant monitoring and potential policy adjustments. Nigeria’s economic growth prospects and market potential played crucial roles in attracting investors seeking profitable opportunities amidst sound fiscal and monetary policies and regulatory reforms,” they said.
It is also noteworthy that in April, the CBN banned commercial banks from accepting foreign currency-denominated collateral for naira loans. The apex bank mandated all banks to wind down loans secured with dollar-denominated collateral within 90 days, or face sanctions. This measure was intended to protect the banking system.
