Between 2019 and 2022, the amount of foreign capital flowing into Nigeria declined from $23.9 billion to $5.32 billion. This drop is attributed to low investor confidence, high costs of doing business, and the country’s high inflation rate. Nigeria will “struggle to keep the exchange rate between the naira and the dollar from falling further” until oil and non-oil exports are boosted, one accounting firm claims.
Nigeria’s high cost of doing business
Accounting firm KPMG, in its latestreport on foreign capital flows into Nigeria, said the amount of capital brought into the West African country fell from $23.9 billion recorded in 2019 to $5.32 billion in 2022. According to the report, the sustained decline in capital inflows into Nigeria can be attributed to “low investor confidence due to an ambiguous foreign exchange system.”
The problems faced in obtaining foreign exchange, Nigeria’s high inflation rate and interest rates are cited as factors in the “sharp decline” in foreign capital inflows to Nigeria. According to the report, Nigeria is not an ideal destination for foreign investment because of its failure to lower the cost of doing business, besides the ongoing foreign exchange problems.
“In addition to the rigidity and lack of clarity in the forex (foreign exchange) management system, other factors are hindering foreign direct investment and capital inflows in general. For example, security challenges, ease of doing business especially related to lack of infrastructure, overly strict policies, bureaucratic bottlenecks in obtaining permits, and a weak legal framework that makes doing business in Nigeria expensive, all contribute to why foreign investors avoid capital inflows,” the report explained .
The growing FX supply gap
It has also been suggested that the suspense created by the recently held national elections may have led to a decline in the value of foreign capital inflows into Nigeria. The slowdown in capital inflows to Nigeria has contributed to the widening of the foreign exchange supply gap.
Meanwhile, the KPMG report concludes that Nigeria will “struggle to contain further depreciation of the naira/dollar exchange rate” unless both oil and non-oil exports are boosted.
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