Too hot for sustainable growth

 There is no doubt that Nigeria is experiencing influx of foreign capital particularly due to prevalence of loose money in the advanced economies. This has resulted in the current build-up of the nation’s foreign reserves. This has the potential of exposing the economy to the risk of sudden withdrawals, with its attendant consequences. Hence, there is need for government and regulatory authorities to ensure that stable fiscal and monetary policies are evolved for sustainable inflows for development.

This is why we align with the observations of Sanusi Lamido Sanusi, Central Bank of Nigeria (CBN) governor, that the current relative stability in almost all the economic indicators occasioned by tight monetary stance should not make us lose sight of the inherent dangers in the influx of volatile portfolio inflows.

“While recognising the good work done in establishing stability on all fronts, we must recognise the inherent risks in the policy and strategy adopted. Reserves have grown to almost $50 billion as indicated, but an increasing percentage of reserve accretion comes from potentially volatile portfolio flows,” Sanusi said.

“In 2012, for example, out of the total capital imported of $16.6 billion, only $2 billion came in the form of [Foreign Direct Investment] FDI, compared to $11.82 billion portfolio inflows into equities and $1.66 billion into bonds and money market instruments,” he added.

Speaking further, the CBN governor said that in the first two months of this year, capital importation amounted to about $4.94 billion. Out of this, 72.2 percent was portfolio investment in the equity market, 10.92 percent in bonds, and 3.05 percent in money market instruments (a total of 86.17 percent). Only 9.52 percent came in as equity FDI. It is therefore important to always bear in mind the financial stability and sustainability implications of these flows.

The irony is that the rush of hot money into the country has helped to stabilise the naira. In essence, Nigeria’s economy runs the risk of becoming a victim of its own success. The CBN has stabilised the domestic foreign exchange by moving its target trading band for the naira to N155+/- 3 percent from N150+/- 3 percent, jerking, slowly, interest rates, and by removing the minimum one-year hold period for government bonds by foreign investors. As a result, the naira ended 2012 as Africa’s best performing currency.

These conditions led to the inclusion of Nigerian bonds in JP Morgan’s emerging market index (GBI-EM). This inclusion, coupled with the zero interest rate policy in the US, UK, Japan and euro zone, is estimated to attract $1.5 billion of portfolio investments.

Ease of entering and exiting the capital market has kept it liquid. The inflows, too, have led to lower yields. Within a year, the yield on Nigeria’s 10-year domestic market, due in 2022, has fallen to 11.06 percent to 15 percent. Nigeria now competes with other emerging markets as a favourable destination.

That said, what Nigeria needs is more patient foreign capital. To attract investments that will build companies that employ our teeming young population, the right policies have to be thought and seen through. According to Jim O’Neill, retiring chairman of Goldman Sachs Asset Management, “Policy mix is not what matters; the trick is to focus on it.”