FX Crisis Restricts Foreign Investment in Nigerian Equities Market

Foreign investment in the Nigerian equities market witnessed a significant decline in January 2024, exacerbated by the ongoing foreign exchange (FX) crisis gripping the nation.

Data from the Nigerian Exchange (NGX) revealed a sharp drop in foreign participation, with figures plunging to 8.15% compared to the previous month’s 13.92% and the corresponding month of 2023’s 12.76%.

Transactions in the Nigerian stock market totaled N651.52 billion in January 2024, a stark increase from the N343.9 billion recorded in the previous month. However, foreign portfolio investments accounted for only N53.11 billion, highlighting the diminishing confidence of foreign investors.

The FX instability and dollar illiquidity, exacerbated by the aftermath of the COVID-19 pandemic, have been key factors deterring foreign investment in Nigeria. The challenge of repatriating earnings promptly has further hindered foreign investors’ participation.

The Central Bank of Nigeria (CBN) has implemented various measures to manage FX volatility, including unifying the foreign exchange market, adjusting bank positions, and removing limits on margins for International Money Transfer Operators (IMTOs).

Despite these efforts, the exchange rate has remained stagnant, prompting the need for fresh dollar inflows to enhance FX supply. Governor Yemi Cardoso engaged foreign portfolio investors to outline the CBN’s reforms aimed at stabilising prices and liberalising the FX market to instil confidence.

Additionally, the CBN recently increased the benchmark interest rate and Cash Reserve Ratio (CRR) to tighten naira liquidity and encourage inter-bank trading activities. The expectation of more frequent Open Market Operations (OMO) issuances further highlights efforts to manage liquidity.

Victor Onyema, Lead at Norrenberger Asset Management, noted the CBN’s commitment to restoring market confidence and enhancing communication with investors. He expressed optimism that the planned resolution of the FX backlog and other initiatives could rebuild trust and attract foreign investment.