Nigeria received a total of $154.97 million as foreign direct investments (FDIs) in the first quarter of 2022, falling by a staggering 56.74% when compared to the $358.23 million total received in the previous quarter. This was stated in the capital importation report released by the National Bureau of Statistics (NBS).
According to the NBS, all the FDIs recorded in the first quarter were in form of equity. It is also worth pointing out that the total capital imported in the period fell by 28.1% to $1.57 billion compared to the preceding quarter ($2.19 billion).
What are FDIs?
Foreign direct investments are inflows into an economy that occur when foreign investors or companies located outside the borders of the receiving country, acquire interests in local companies.
Most world economies desire foreign direct investments as they often help to spur growth in the economy. This is because, when foreigners buy interests in local companies or establish new businesses within the country, they bring in foreign exchange, which results in more liquidity in terms of FX in the economy. Foreign direct investments also help in creating employment opportunities for the country’s labour force.
In Nigeria, however, a downside risk for foreign investors in the economy is the recurring issue of repatriating their funds. Being a country with a shortage of forex supply as a result of dwindling dollar inflow and rising import bills, foreign investors find it hard to ramp up their investments in dollars if and when they wish to take profit and leave. This has been a major setback for investors and has significantly affected the growth in foreign direct investments in the country.
How dwindling FDIs affects businesses
The Nigerian economy is very sensitive to exchange rate fluctuations because the country is highly dependent on foreign goods and services. Foreign direct investment is one of the sources by which the country gets access to foreign exchange, which is used to fund the import bill and defend the Naira at the official market.
As at the time of writing, the dollar is already trading as high as N610/$1 at the parallel market following the scarcity of forex in the economy, with demand still on the rise. The downturn in foreign direct investments translates to lower forex for the Central Bank to fund the dollar demand. By implication, this puts the naira at risk of further depreciation.
With the earlier hint that the Nigerian economy is sensitive to exchange rate volatility as a result of importation, a depreciating local currency will result in further inflationary pressure. This means that businesses will have to spend more on their operating expenses, thereby affecting their profitability.
