On inflows and interests
In the first quarter of 2024, Nigeria’s capital importation surged by 198.06% to $3.38 billion, largely driven by portfolio investments, while Foreign Direct Investment (FDI) accounted for only 3.53%. This marked a significant increase from $1.132 billion in Q1 2023. Portfolio investments dominated with $2.08 billion (61.48%), followed by other investments at $1.18 billion (34.99%). Meanwhile, Aliko Dangote, Chairman of the Dangote Group, criticised the Central Bank of Nigeria’s interest rate hike to nearly 30%, warning it could hinder job creation and growth in the manufacturing sector. He urged for new policies to safeguard domestic industries.
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The increased flow of capital into Nigeria’s economy is not unexpected after the central bank’s monetary policy committee decided to raise interest rates. In the first quarter of 2024, 47% of the foreign capital imported into the country was from money market instruments (treasury bills and commercial papers) and 34% from foreign loans. Foreign direct investment declined by 35% in the first quarter of 2024 — a sign that the government still needs to do more to attract the type of patient capital that creates jobs and grows the economy. In the interim, the FDI and loan inflows mean that the CBN has ammunition to support the naira, and importers’ forex demands can be met. Conversely, the rate hike that has attracted the FDI is causing pain for businesses operating locally. The fixation on preferential policies, including interest rates and access to foreign exchange, to protect domestic industries has long been the norm in Nigeria. It has yielded very little returns for most Nigerians, with little transparency, accountability, and deliverables tied to such policies. It doesn’t take a rocket scientist to diagnose that an extra-high interest rate will hurt the economy. The interest rate permeates all aspects of the economy, including food prices, wages, working capital and project finance costs for businesses, mortgage rates for homeowners, and public debt. The interest rate hike means getting loans to expand operations is more expensive. While the Central Bank of Nigeria cannot stand by and watch inflation continue to rise, the government must realise that high prices are mainly due to structural issues in the economy rather than system liquidity. These structural issues include high import and transportation costs, unreliable power supply, excessive taxation, reduced food production largely due to insecurity, and the low productivity of the Nigerian economy, resulting in import dependence. Therefore, using monetary policy tools to address Nigeria’s inflation problems would be like using antibiotics to treat a fungal infection. Moreover, while many countries offer incentives to their domestic manufacturers, the effective ones always include strict performance deliverables such as export discipline and providing the lowest price to domestic markets. Nigerian industrialists have not met any of these deliverables, yet they continue to demand preferential treatment at the expense of the Nigerian taxpayer. In the current climate, where Foreign Direct Investment is at record lows, signalling low investor trust in taking risks in Nigeria, they cannot continue to make these demands.
