Forex Flounders: Nigeria’s ‘Ambiguous Foreign Exchange Regime’ Takes the Blame for Record-Low Inflows in 2022

Foreign Capital Inflow into Nigeria Drops Significantly Due to Low Investor Confidence and High Inflation Rate, Experts Warn of Struggle to Keep Naira to Dollar Exchange Rate

The value of foreign capital flowing into Nigeria has dropped from $23.9 billion in 2019 to $5.32 billion in 2022. This decrease has been attributed to low investor confidence, high inflation rates and the country’s high cost of doing business. KPMG, an accounting firm, has stated that Nigeria will continue to struggle to keep the naira to the dollar exchange rate from depreciating further until crude oil and non-oil exports are boosted.

KPMG’s latest report on the flow of foreign capital into Nigeria has revealed that the persistent decline in the amount of capital flowing into the country can be attributed to “low investor confidence due to the ambiguous foreign exchange regime.” The challenges encountered when seeking to access foreign exchange, as well as Nigeria’s high inflation rate and interest rates, are listed as some of the factors that contributed to the “precipitous decline” in foreign capital flowing into the country.

Besides the country’s ongoing foreign exchange woes, the report said Nigeria’s failure to lower the cost of doing business makes it a less-than-ideal foreign investment destination. “Beyond the rigidity and lack of clarity in the FX [foreign exchange] management system, other factors have discouraged Foreign Direct Investment and capital inflow, in general, such as security challenges, ease of doing business issues particularly as it relates to the infrastructure deficit, overly stringent policies and bureaucratic bottlenecks for securing permits and a perceived weak legal framework, which make it expensive to do business in Nigeria are contributing to the reasons foreign investors are avoiding bringing their capital into the country,” the report explained.

The report also suggested that the suspense created by the recently held national elections may have contributed to the drop in the value of foreign capital flowing into Nigeria. The slowdown in the value of capital flowing into Nigeria has contributed to the widening of the forex supply gap.

Nigeria will likely “struggle to keep the naira to the dollar exchange rate from depreciating further” unless both crude oil and non-oil exports are boosted, according to the KPMG report. The report ends by stating that Nigeria needs to address the challenges it faces in order to attract foreign investment.

Nigeria’s high cost of doing business, security challenges, infrastructure deficit, overly stringent policies, bureaucratic bottlenecks for securing permits and a perceived weak legal framework are contributing factors to the decline in foreign capital inflow. The country needs to address these challenges to attract foreign investment.

In conclusion, Nigeria’s decline in foreign capital inflow has been attributed to low investor confidence, high inflation rates and the country’s high cost of doing business. The challenges encountered when seeking to access foreign exchange, as well as Nigeria’s failure to lower the cost of doing business, make it a less-than-ideal foreign investment destination. Nigeria needs to address these challenges to attract foreign investment and boost both crude oil and non-oil exports in order to keep the naira to the dollar exchange rate from depreciating further.

Martin Reid

Martin Reid

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