•Says Fed rate hike litmus test for Nigeria’s $5461bn reserves, FX market
Chairman of the Alliance for Economic Research and Ethics, AERE, Mr Dele Oye, has said Nigeria’s economy remains under severe strain despite attracting $10.37 billion in capital inflows, warning that the composition of the inflows raises concerns about the country’s reliance on short-term foreign portfolio investment.
Oye said the size of the capital inflow should not be mistaken for evidence that the Nigerian economy was attracting sufficient long-term productive investment
Oye, who was reacting to the United States Federal Reserve’s interest rates raise for the first time in more than three years, to 375–4.00 per cent, noted that the dominance of portfolio investment in the inflow points to a deeper challenge, as such funds can move quickly in response to changes in interest rates, exchange rates and investor sentiment.
On the interest rate raise, Oye said any further interest-rate hike by the US Federal Reserve would be a major test of the strength of Nigeria’s $5461 billion foreign exchange reserves and the stability of the naira market.
He noted that the impact of tighter monetary conditions in the US could be felt across emerging markets as investors reassess the returns and risks associated with holding assets in countries such as Nigeria
He said Nigeria’s ability to retain foreign capital and maintain stability in the foreign exchange market would depend partly on the resilience of its external reserves and the confidence of investors in the country’s economic reforms
According to him, the level of Nigeria’s reserves provides an important buffer, but the real test is whether the country can withstand renewed pressure on the naira without significant depletion of its external buffers
Oye said policymakers must, therefore, closely monitor capital flows, foreign exchange demand and global interest-rate movements while ensuring that the country’s reserves are used strategically
He also stressed the need to strengthen non-oil exports and attract more stable foreign direct investment as part of efforts to reduce Nigeria’s vulnerability to external shocks
Oye said the focus should be on building an economy capable of generating sufficient foreign exchange through production and exports rather than relying excessively on volatile portfolio flows
On Nigeria’s $1037bn capital Inflow, Oye said the country needs to attract more foreign direct investment (FDI) capable of establishing businesses, expanding production, creating jobs and strengthening the country’s productive capacity.
Oye noted that while the $1037 billion capital inflow was significant, what matters more is how much of the money is going into productive activities that can generate sustainable economic growth.
He said an economy cannot achieve broad-based growth simply by recording large capital inflows if the investment does not translate into increased production, employment, and infrastructure and improved living standards
The AERE chairman said Nigeria must, therefore, focus on creating an environment that encourages long-term investors to commit capital to manufacturing, agriculture, technology, infrastructure and other productive sectors
He identified policy stability, infrastructure, regulatory certainty and a reduction in the cost of doing business as critical factors in attracting sustainable FDI
Oye said Nigeria’s economic reforms should ultimately be measured by their impact on businesses and households, particularly through increased investment, job creation, higher production and improved purchasing power
Oye said stronger FDI would provide a more sustainable foundation for economic expansion than excessive dependence on portfolio flows, which are more sensitive to market conditions