Foreign Inflow to Nigerian Equities Drops 90.6% in 10 Years, Urgent Reforms Needed
Foreign investment in Nigerian equities has suffered a significant decline of 90.6% over the past decade, according to the Domestic and Foreign Portfolio Investment Report by the Nigerian Exchange Limited (NGX). The decrease in total foreign inflow (TFI) plummeted from N43 billion in 2013 to a mere N4.6 billion as of March 2023. Meanwhile, domestic transactions have experienced a contrasting trend, with a 93.7% increase from N71 billion in 2013 to N137 billion in March 2023.
The drastic drop in foreign inflow to Nigerian equities has raised concerns among stakeholders, who emphasize the need for urgent reforms. These stakeholders argue that the government must implement inclusive growth principles and align policy decisions with monetary, fiscal, trade, and investment considerations to stimulate economic activity, including in the stock market.
The continued lack of interest from foreign investors in Nigerian stocks can be attributed to various factors, notably currency illiquidity, inflation, a high interest rate environment, and other macroeconomic challenges. The depreciating value of the naira, in particular, has deterred foreign portfolio investors (FPIs) from entering the Nigerian market. Economic policies that lack clarity and uncertainty surrounding the investment landscape have further dissuaded foreign investors.
To restore confidence and attract foreign investors, experts stress the importance of addressing currency illiquidity, which hampers Nigeria’s economic progress. Amaechi Egbo, an independent investor, emphasizes that foreign investors would return to the market if the necessary rules and regulations were in place.
Dr. Muda Yusuf, Director/Chief Executive Officer of the Center for the Promotion of Private Enterprise (CPPE), calls on monetary authorities to develop a durable intervention framework that moderates the volatility in the foreign exchange market. While acknowledging the restrictions on foreign exchange supply, Yusuf emphasizes the importance of managing the system in a way that does not undermine investor confidence. A loss of confidence leads to speculation and uncertainty among economic players.
Yusuf stresses that the Nigerian market has accumulated a backlog of unmet foreign exchange demand, amounting to billions of dollars, due to acute illiquidity. He suggests that with a more liberalized forex market, the pressure of this backlog and other forex-related obligations has intensified, affecting both investors and exporters.
It is worth noting that the frequency and scale of Central Bank of Nigeria (CBN) interventions in the forex market have reduced compared to the earlier months of the year. According to recent reports from the CBN, there has been a total intervention of $17 billion in the forex market in 2022, averaging N1.4 billion per month. However, it remains unclear whether interventions of this magnitude have been witnessed under the present administration. To mitigate volatility, it is necessary to improve the scale of intervention, which could lead to more stabilized conditions in the market.
To protect the market from speculative attacks and illegal capital outflows, Yusuf advocates for enhanced monitoring of foreign exchange demands by the CBN.
The declining foreign inflow in Nigerian equities necessitates urgent reforms. The government must take proactive measures, such as addressing currency illiquidity and implementing policies in line with economic considerations, to restore foreign investors’ trust in the Nigerian market. By fostering a more stable and transparent investment environment, Nigeria can attract the much-needed foreign capital to support its economic growth and development.
