By Tanimu Yakubu
INTRODUCTION
The unsigned commentary under review presents itself as a forensic examination of Nigeria’s recent capital-importation figures. Its central thesis is that because a substantial proportion of recent inflows entered Treasury bills and other money-market instruments rather than factories and industrial enterprises, the inflows should not be interpreted as evidence of confidence in Nigeria’s economy. Instead, they are characterised as speculative, transient and symptomatic of deeper economic weakness.
The argument is forcefully stated. Unfortunately, it rests upon a misunderstanding of how capital typically returns to economies emerging from periods of macroeconomic instability and undertaking major policy adjustment.
THE NATURE OF PORTFOLIO CAPITAL AND FOREIGN DIRECT INVESTMENT
The first weakness in the argument lies in its treatment of foreign portfolio investment as though it were an inferior and economically insignificant form of capital. Economic history provides little support for such a view.
In virtually every major emerging-market recovery of the last four decades, portfolio capital arrived before substantial foreign direct investment. This was true in India following the reforms of the early 1990s, in Indonesia after the Asian Financial Crisis, and in Egypt following exchange-rate liberalisation in 2016.
Portfolio investment and foreign direct investment are fundamentally different economic decisions with entirely different time horizons. A portfolio investor can assess macroeconomic conditions and allocate capital within days or weeks. By contrast, before a multinational corporation commits hundreds of millions of dollars to a manufacturing facility, energy project, logistics hub or processing plant, it must undertake feasibility studies, engineering assessments, environmental reviews, legal due diligence, tax planning, land acquisition, financing arrangements, board approvals and often shareholder consultations. Such processes frequently require years rather than months.
Financial capital therefore responds more quickly to improving economic conditions than productive capital. To cite current FDI levels as proof that reforms have failed is to evaluate a long-gestation process before it has had sufficient time to mature.
INTEREST RATES, RISK AND INVESTOR BEHAVIOUR
The article repeatedly suggests that foreign investors are purchasing Nigerian securities merely because yields are high. Such reasoning confuses nominal returns with real returns and overlooks one of the most elementary principles of international finance.
Investors do not allocate capital solely on the basis of the interest rate printed on a Treasury bill. They evaluate expected returns after accounting for inflation, exchange-rate risk, sovereign risk, liquidity risk and political risk. A 25 percent yield is of little value if investors simultaneously expect a substantially larger currency depreciation.
The willingness of investors to acquire and hold naira-denominated assets therefore reflects a judgement that the balance between risk and return has improved relative to previous periods.
THE LESSONS OF 2015–2016
The characterisation of portfolio flows as merely ‘hot money’ neglects an important chapter in Nigeria’s own recent history.
Between 2015 and 2016, foreign portfolio inflows declined sharply as investors became increasingly concerned about exchange-rate policy, foreign-exchange liquidity and macroeconomic uncertainty. The consequences were immediate and significant. Foreign-exchange liquidity tightened, pressure on the exchange rate intensified, divergence between official and parallel-market rates widened, inflationary pressures increased and economic growth slowed.
If portfolio capital is economically irrelevant, it becomes difficult to explain why its disappearance produced such profound consequences for reserves, exchange-rate stability, current-account financing and overall macroeconomic confidence. The reality is that portfolio flows constitute an important component of modern international finance and their presence or absence carries significant implications for economic performance.
MONETARIST AND KEYNESIAN PERSPECTIVES
Both monetarist and Keynesian traditions would recognise the significance of capital flows, albeit for different reasons.
From a monetarist perspective, capital inflows contribute to the supply of foreign exchange available within the economy, support monetary stability and help moderate imported inflation by reducing pressure on the exchange rate.
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