If Nigeria’s high inflation and lingering foreign exchange crisis are not contained, investors’ appetite for the most populous nation in Africa could shrink further as the country’s much-need investment can be re-directed to other markets, according to the intelligence unit of the Economist.
In a recent five years outlook report for Nigeria, the Economist said the protectionist economic policy that will be used by the Central Bank of Nigeria to support local industry will contribute to macroeconomic imbalances, notably high inflation and periodic hard-currency shortages that will deter long-term investment into Nigeria.
“Foreign-exchange controls on imported goods, for which domestic supply is inadequate, and conflict in the Middle Belt—Nigeria’s breadbasket—will keep inflation structurally high and above the 9 percent target ceiling in all five years forecast period,” research analyst at the unit said.
A low inflation rate and a favourable exchange environment are some of the major determinants of positive long-term return on investment. With a double-digit inflation rate and lingering foreign exchange crisis, Africa’s largest economy has been struggling to attract much-needed foreign direct investment.
“If investors continue to witness lower yields compare to inflation numbers, they would be unwilling to invest and this has been one of the reasons why we are seeing a lot of risk-off sentiment by foreign investors,” Akintoye Oyelakun, Investment Manager in Cordros Asset Management Limited.
Though declining amid the sixth consecutive slowdown in the inflation rate, Nigeria’s negative real return, according to analysts is a discouragement to foreign investors who are exploring the higher returns in neighbouring markets. The investment yield on Nigeria’s one-year Treasury bill fell to 5.89 percent in November from a record-high of 9.15 percent on July 14, 2021. With the inflation rate at 15.99 percent, the real return on the 364-day bill, the difference between the inflation and interest rate stood at -10.1 percent. As inflation tends to harm the currency, investors are liable to get returns that are above the inflation rate to cover for the potential differentiation to take the risk of investing, according to market analysts.
“Investors would begin to search for other alternatives that could give them favourable returns if they are not attracted with returns that are at least above the inflation rate,” Akintoye Oyelakun, Investment Manager in Cordros Asset Management Limited. Also, Nigeria’s lingering foreign exchange challenges which have worsened the naira instability against the dollars over the years has remained a turnoff, market analysts said.
According to the Economist Intelligence Unit’s country report for Nigeria, a rate of N440.6 against the $1 is expected by the end-2024 (average depreciation of 3.4% each year). This is from an end-2021 estimated rate of N414.7 against $1. Substantial devaluations are expected in 2025-26 as oil prices slide, underscoring historical overvaluation, the report said.
“We expect a rate of N530 against the $1 by end-2025 and N623.2 against $1 by end-2026, although even at these rates the REER will remain high relative to long-term historical averages,” the Economist Intelligence Unit said. Nigeria’s dollar supply challenges come from its dependency on the foreign earnings from crude oil, which has continued to account for over 90 percent of its dollar source. Although on the rise, the falling global crude price always reduces dollar supply in Nigeria which consequently leads to the naira devaluation.