Last week the National Bureau of Statistics (NBS) released the capital importation report for the first quarter of 2019. On the surface the numbers show an increase in capital inflows by 216 percent from the previous quarter and by almost 35 percent from the same period last year, with overall inflow coming in at just under $8.5bn. Sounds good right? Well not quite.
The devil is in the details as they say. Looking at the breakdown of inflows, the lion share was made up of foreign portfolio flows, mostly going towards purchasing money market instruments. Inflows into these instruments accounted for roughly 70 percent of all inflows.
For those who are not well versed in financial-lingo this means foreign investors bought almost $6bn worth of federal government and central bank short term securities. Or if that still isn’t simple enough, foreign investors loaned money to the federal government and the CBN for between 90 and 180 days. At interesting interest rates too. CBN bills yielded around 11 to 14 percent in Q1 2019. If you add the exchange rate “stability” then essentially foreign investors are loaning dollars to the CBN and the government at between 11 and 14 percent interest. Returns which, as it turns out, are too attractive to resist.
Why would the CBN be offering such returns? The way I see it the CBN is in a kind of a hostage crisis. It has promised to keep exchange rates fixed, sorry “stable”. To do this it needs dollars. US dollars, not Zimbabwean dollars. Dollars it does not really have. And since it doesn’t have it is essentially borrowing these dollars from portfolio funds. There are roughly $45bn worth of CBN bills in circulation and word on the street is that foreign portfolio funds hold almost $16bn worth. What happens if these foreign portfolio funds decide, for whatever reason, that they want to exit their positions and take their dollars and leave?
If you think about it, it kind of looks like a hostage situation with the hostage-takers being the portfolio funds and the “gun to the head” being their holdings of CBN bills.
The CBN is the victim of course. Except in this case the CBN keeps supplying their kidnappers with more bullets. If the CBN decides to stop selling CBN bills, or even to retire some of the current CBN bills, it could lead to another bout of inflation. That thing that is CBN’s primary objective. But if they continue selling then the costs will keep piling up. Last year the interest on these CBN bills reportedly costs north of $5bn so it can’t keep it up indefinitely. Eventually they would run out of dollars. Then what?
Of course, the CBN could just allow a flexible exchange rate and that would limit the appetite for these CBN bills and give the CBN a path to unwinding them. But everyone knows the CBN is opposed to any kind of voluntary exchange rate movement. So, who will blink first? Or will the status quo hold until some external event shocks us all back into consciousness?
As far as the “real” economy is concerned, the capital importation reports tell the same old story. No improvement in foreign direct investment. The investment in plants, and businesses, and infrastructure that the “real” economy desperately needs. Foreign direct investment at just under $250m, and just under three percent of all inflows, was marginally higher than the last quarter but lower than the 2018 average. And 2018 was not a great year. We are on track to attract less foreign direct investment that smaller countries like Ghana.
If you dig deeper into the numbers and look at state attractiveness then the numbers are sad. Majority of states attracted no foreign direct investment in the first quarter of the year. In fact, there are some states that haven’t attracted any investment in years. Remember that even the smallest states are larger than some African countries. So, for a state or country to attract no investment in years should have alarm bells ringing. As far as investment in the real economy is concerned we are a long way from being attractive.
What do we need to do to attract FDI? That one is a matter for another day.
Dr. Nonso is chief economist at Business Day