The declining capital inflow into Nigeria

The report released recently by the National Bureau of Statistics (NBS) that the total value of inflow of foreign capital into the Nigerian economy in the second quarter of this year crumbled by 77.88 per cent relative to the first quarter is quite worrisome. This is more so considering the fact that the nation’s economy is facing another round of recession.

The country’s Q2 2020 foreign capital inflow figure, which stood at $1.295 billion, fell by 78.60 per cent from the one recorded in the corresponding period of 2020 as Africa’s biggest economy takes a double whammy from a record crash in the price of oil, its top export commodity, and the coronavirus pandemic.

The largest amount of capital importation by type was received through other investment, which accounted for 58.77 per cent ($761.03m) of total capital imported, followed by Portfolio “Investment, which accounted for 29.76 per cent ($385.32m) and Foreign Direct Investment (FDI), which accounted for 11.47% ($148.59m) of total capital imported in Q2 2020,” the statistics office said in its Nigerian Capital Importation Q2 2020 Report.

On sectorial basis, capital importation by shares dominated in Q2 2020, accounting for $465.57 million of the entire capital importation in the period. The biggest source of capital investment to Nigeria was the United Kingdom, which provided $428.83 million or 32.12 per cent of the nation’s foreign capital inflow.

Lagos state was the number one destination of capital investment, accounting for as much as $1.130 billion or 87.30 per cent of Nigeria’s capital information figure. By bank, Standard Chartered emerged at the top of capital investment in Nigeria at $425.21 million, translating to 32.84 per cent. Foreign Direct Investment, which constituted $148.590 million of the Q2 2020 figure, contracted by 30.65 per cent quarter on quarter (QoQ) and 33.41 per cent year on year (YoY).

Portfolio Investment, however, accounted for $385.32 million of the foreign capital inflow figure for the period, falling by 91.06% QoQ and 91.14 YoY. Of this, money market instruments made up $332.07 while equity was responsible for the rest $53.25 million. Other Investment totaled $761.03 million, declining by 42.81% QoQ and 48.60% YoY. This category comprised Loans ($726 million) and Other Claims ($35.04 million).

The World Bank in its latest Nigeria Development Update report released recently said the collapse in oil prices resulting from Covid-19 pandemic is expected to plunge the Nigerian economy into a severe economic recession, the worst since the 1980s.

The report, titled ‘Nigeria in times of Covid-19: Laying foundations for a strong recovery,’ estimated that Nigeria’s economy would likely contract by 3.2 per cent in 2020. It said, “This projection assumes that the spread of Covid-19 in Nigeria is contained by the third quarter of 2020. “If the spread of the virus becomes more severe, the economy could contract further.”

It stated that before Covid-19, the Nigerian economy was expected to grow by 2.1 per cent in 2020, which meant that the pandemic had led to a reduction in growth by more than five percentage points.

The macroeconomic impact of the COVID-19 pandemic would likely be significant, even if Nigeria managed to contain the spread of the virus, it added. It stated that oil represented more than 80 per cent of Nigeria’s exports, 30 per cent of its banking-sector credit, and 50 per cent of the overall government revenue.

With the drop in oil prices, government revenues were expected to fall from an already low eight per cent of Gross Domestic Product in 2019 to a projected five per cent in 2020. The bank stated, “This comes at a time when fiscal resources are urgently needed to contain the COVID-19 outbreak and stimulate the economy.”

It noted that the pandemic had also led to a fall in private investment due to greater uncertainty, and was expected to reduce remittances to Nigerian households. The remittances in recent years had been larger than the combined amount of foreign direct investment and overseas development assistance.

World Bank Country Director for Nigeria, Shubham Chaudhuri, stated, “While the long-term economic impact of the global pandemic is uncertain, the effectiveness of the government’s response is important to determine the speed, quality, and sustainability of Nigeria’s economic recovery.

“Besides immediate efforts to contain the spread of Covid-19 and stimulate the economy, it will be even more urgent to address bottlenecks that hinder the productivity of the economy and job creation.”

The report showed that the human cost of Covid-19 could be high. Beyond the loss of life, it added, the Covid-19 shock alone was projected to push about five million more Nigerians into poverty in 2020.

Without a doubt, the decline in foreign capital inflow to Nigeria should rattle the managers of the nation’s economy, particularly at a time the nation is grappling with declining revenue from crude oil. Consequently, we urge the federal government to vigorously pursue and enhance the policy on foreign capital flows in order to provide a buffer to the nation’s dwindling internally generated revenue (IGR) amidst a rapidly growing population.

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