Nigeria’s Capital Inflows Set to Hit Five-Year High, Afrinvest Reports

Nigeria is poised to see its capital inflows reach a five-year high, according to a recent report by Afrinvest (West Africa) Limited.

This notable growth reflects increasing confidence from foreign investors despite ongoing economic challenges.

Afrinvest’s report, citing data from the National Bureau of Statistics (NBS), reveals that total capital inflows surged by 198.1% year-on-year to $3.4 billion in the first quarter of 2024.

This marks the highest level of capital importation since the first quarter of 2020.

The report also highlights a potential for total capital importation to reach $13.5 billion by the end of the year, should the current trend continue.

“While capital importation is well on course to hitting a five-year high, it then becomes a bittersweet moment as Nigeria can’t afford to keep relying on expensive loans to boost foreign investment inflows,” Afrinvest’s report cautions.

The NBS data shows that portfolio investment dominated the capital inflows, accounting for $2.08 billion or 61.5% of the total.

This was followed by other investments, which contributed $1.18 billion or 34.9%, and foreign direct investment, which stood at $119.2 million, making up just 3.53% of the total capital importation.

Afrinvest further breaks down the inflows by sector, noting that the banking sector attracted the largest share at 61.2%, followed by trading at 14.7%, and production at 5.7%.

The significant inflows into the banking sector are partly attributed to improved Open Market Operations (OMO) issuances, while the rise in trading inflows is linked to the attraction of Nigeria’s exports due to a weaker naira.

“Foreign Portfolio Investment (FPI) – the largest component of the total capital importation with a 61.5% share – advanced 219.7% year-on-year to $2.1 billion, driven by improved inflows into money markets and bonds,” the report states.

The report also notes a substantial increase in foreign currency loans, which were up 165.3% and accounted for 94% of inflows in the other investments segment.

This influx of foreign currency loans, primarily secured by private businesses, highlights a reliance on costly foreign debt due to the challenging business environment in Nigeria.

“This reality does not bode well for the nation’s economy as it implies the lack of confidence by foreign investors to directly invest their assets in Nigeria,” Afrinvest warns.

“Given the current pricey state of capital in the global market, especially for emerging economies with weak credit ratings like Nigeria, the foreign currency loans were likely secured at elevated rates.”

Despite the positive trend in capital inflows, Afrinvest emphasizes the need for Nigeria to reduce its dependency on expensive loans to sustain foreign investment.

The firm suggests that while the current inflow trajectory is promising, the reliance on costly foreign debt poses significant risks to the nation’s economic stability.