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Wednesday, September 28, 2022
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Sustainable Foreign Exchange Earnings: The Regulatory perspective

By Lamido A. Yuguda

In recent years, Nigeria has experienced a significant decline in foreign exchange earnings as well as revenues accruable to the federation. This was mainly due to volatility in international crude oil prices.

In the past few months, this has been exacerbated by low oil production and oil theft in the country. This has often resulted in foreign exchange shortages and balance-of-payment problems.

These recent developments have again brought to the fore the important issue of sustainable foreign exchange earnings.

Foreign exchange is a scarce resource that needs to be efficiently managed with a view to achieving macroeconomic stability, as well as avoiding balance of payments and external reserve problems.

Sustainable levels of foreign exchange earnings and external reserves are the backbone of any nation’s exchange rate. They ensure the stability of the rate and low levels weaken a nation’s currency.

To this end, the Federal Government of Nigeria is intensifying efforts toward diversifying the economy and reducing overdependence on crude oil.

Numerous programmes such as the CBN Anchor Borrowers Programme as well as the NEXIM Bank Export Stimulation Fund constitute some of the few deliberate efforts of the Government to ensure not only food stability and sufficiency in the country but also sustainable foreign exchange stability in the country.

The Nigerian capital market has a significant role to play in contributing to sustainable foreign exchange earnings. It can attract more foreign portfolios and direct investments which will help stabilize the value of the naira. To do this, the market must be more competitive, as other markets also seek the same foreign capital inflows.

The 10-year Nigerian Capital Market Master Plan (2015-2025) is built around four strategic themes one of which is competitiveness.

It seeks to promote competitiveness by establishing practices to improve transparency, efficiency and liquidity and to attract sustainable interest in the capital market from domestic, as well as foreign investors and participants. This objective clearly focuses on the various elements that make capital markets competitive as a choice for capital and portfolio inflows.

A historical analysis of the foreign portfolio participation in equity trading on the Nigerian exchange reveals that over the last fifteen (15) year period, foreign transactions in the Nigerian exchange decreased by 29.38 per cent from N616 billion to N435 billion.

In 2021, Total domestic transactions accounted for about 77 per cent of the total transactions carried out in 2021, whilst foreign transactions accounted for about 23 per cent of the total transactions in the same period.

READ ALSO:¬†Bank chief seeks value-added commodity exports to boost Nigeria’s revenue

These are not the kinds of statistics we want, but they have been brought about by sustained forex illiquidity concerns which have resulted in many foreign investors pulling out of the Nigerian market, leading to the decline in foreign participation in the equity market.

According to data from the National Bureau of Statistics, the total value of capital importation into Nigeria in the second quarter of 2022 stood at $1,535.35 million. The largest amount of capital importation was received through Portfolio Investments, which accounted for 49.33 per cent or $757.32 million.

Foreign Direct Investments (FDI) accounted for 9.58 per cent or $147.16 million while Other Investments stood at 41.09 per cent or $630.87 million.

The largest amount of portfolio investment went to money market instruments – 55.8 per cent or $422.56 million. Bonds followed with 42.5 per cent or $322.04 million and Equities accounted for 1.68 per cent or $12.72 million of Portfolio investment in Q2 2022.

The Securities and Exchange Commission continues to advocate strategic initiatives to develop the capital market as a robust and sustainable source of foreign exchange for the country. It has introduced new market-deepening initiatives and is implementing policies targeted at attracting foreign investments.

One such initiative is the comprehensive review of rules on Collective Investment Schemes (CIS) leading to a reduction of transaction and operational costs, better classification of funds for clarity, improved risk management measures, and several others.

The Securities and Exchange Commission continues to advocate a unified foreign exchange rate in order to attract more Foreign Portfolio Investments into the country.

We appreciate the efforts of the Central Bank of Nigeria in exchange rate management and will support in whatever way we can to enable the achievement of the objective of exchange rate stability

Aside from our efforts in attracting more foreign investors into the traditional equities and bond markets, the Commission has also been committed to developing the commodities ecosystem as a potent way forward in Nigeria’s quest for sustainable foreign exchange earnings and economic development.

We believe that the implementation of the Roadmap for a vibrant Commodities Trading Ecosystem in Nigeria by the Commission will support development of the agricultural sector and diversification of the Nigerian economy and, ultimately, advance the country towards attaining sustainable foreign exchange earnings.

It is imperative that we focus on all the sustainable foreign exchange earning avenues of the capital market to support us over the medium to long term.

We must therefore leverage the Capital market through the commodities ecosystem, and the equity and bond markets to develop and exploit all the potential sources of forex.

  • Text of paper presented at FICAN annual workshop in Lagos
  • Yuguda is the Director General, Securities and Exchange Commission

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