Nigeria’s FX Crisis Deepens As Foreign Investments Drop Amid Liquidity Concerns

The persistent FX crisis in Nigeria has caused a significant downturn in foreign investments, with investors fleeing the market. Nigeria, once Africa’s largest economy, has struggled to attract both foreign direct investments (FDI) and foreign portfolio investments (FPI). Experts say the country’s worsening FX liquidity is the key driver of this investment slump.

Data from the National Bureau of Statistics (NBS) shows that FDI plummeted by 75% in the second quarter, down to just $29.8 million from $119 million in the first quarter. Meanwhile, FPI, which usually dominates Nigeria’s capital inflows, fell by 32% to $1.4 billion over the same period.

FX Crisis and Macroeconomic Challenges Deter Investors

Analysts have pointed to the ongoing FX crisis, coupled with rising inflation and insecurity, as the main reasons behind the steep decline in investment. FBNQuest Capital analysts noted in a recent report, “The shift in foreign investor confidence was as a result of macroeconomic challenges, including FX liquidity concerns, rising inflation, and fiscal constraints.”

The naira has been severely devalued, losing about 70% of its value under the administration of President Bola Tinubu. Currently, the naira trades at around N1,511.34 to the US dollar at the Investors and Exporters window, a significant drop in value that has alarmed foreign investors.

However, there was a brief respite this week, as the naira gained 4% against the dollar, hitting N1,625.15, according to data from FMDQ. Still, this minor improvement hasn’t been enough to restore investor confidence.

CBN’s Attempts to Curb the FX Crisis

In response to the FX crisis, the Central Bank of Nigeria (CBN), led by Governor Olayemi Cardoso, has introduced measures to stabilise the market. In September, the CBN sold $543 million to Bureau de Change operators at a rate of N1,590 to the dollar. The bank allowed a 1% margin for traders.

READ ALSO: Weak Naira: CBN Sells $543.5m To Boost FX Market

Despite these efforts, the liquidity crisis continues to affect the market. In an effort to curb inflation, the CBN also raised its benchmark interest rates by 50 basis points to 27.25%. However, the impact on foreign investments has been limited.

“Despite the carry-trade opportunities for FPIs presented by the CBN’s hawkish monetary policy stance, the outlook for participation in direct investment remains bleak primarily because of concerns related to FX liquidity,” FBNQuest Capital analysts added.

Investors Reluctant Amid FX Volatility

A source familiar with the situation said that many foreign investors have been hesitant to enter Nigeria’s market due to the volatility of the FX market. “Investors are not streaming in because it was like all the money they were throwing into the market was going into a hole. They were just losing money,” the source explained.

Many investors who initially entered when the naira traded at N1,200 to the dollar saw their investments shrink as the exchange rate approached N1,700. “That’s why they stayed away to keep watching the market and see what’s happening,” the source added.

Delays in Capital Importation Certificates Worsen the FX Crisis

A significant barrier to foreign investment is the delay in issuing Certificates of Capital Importation (CCI). Previously handled by commercial banks, this process has now shifted to the CBN, creating backlogs. These certificates are essential for foreign investors, allowing them to repatriate profits and capital gains.

“There are backlogs of CCI issuances for some offshore investors. They’ve brought in money but don’t have the CCI. They’re afraid,” the source said, adding, “It’s like shooting ourselves in the foot sometimes.”

Investment Returns Unattractive in a Struggling Economy

Tobi Ehinmosan, a macroeconomic analyst at FBNQuest Capital, emphasised that investors seek out economies that promise high returns and a secure avenue for repatriation of gains. However, Nigeria’s FX crisis makes that increasingly difficult.

“No one wants to invest in a struggling economy because every investor aims to earn a certain kind of revenue,” Ehinmosan said. “Nigeria, right now, doesn’t guarantee that.”

As Nigeria continues to grapple with its FX crisis, both local and foreign investors remain cautious, waiting for clearer signs of market stabilisation before committing further funds to the country.