JAN30

A guide on foreign participation in Nigeria

Nigeria’s economic potential is constrained by many structural issues, including inadequate infrastructure, tariff and non-tariff barriers to trade, obstacles to investment, lack of confidence in currency valuation, and limited foreign exchange capacity.The Nigerian economy has been bedeviled by the challenge of instability in its foreign exchange rate market due to a high level of volatility. Exchange rate fluctuation is the continuous gyration in the foreign exchange market of nations which has emerged as the dominant subject of discussion in recent international finance literature owing to its fatal consequences on the economies of developing nations like Nigeria.

The common trend now to investment is to “buy the dollar and preserve their naira earnings.” While in theory, this sounds like a well-thought-out plan or hedge as we call it in finance, there are certain flaws to it. Engaging in this form of hedging – inadvertently makes one a currency trader vulnerable to volatility. Foreign exchange rates can change rapidly in response to any real- time economic and political events. The tendency to always buy at whatever price will possibly lead you to buy at high prices and when it hits a negative inflection point – the purpose of “preserving value” is defeated. In this particular case, the investment objective of many Nigerians is to preserve their earnings in foreign currencies. They just want value – not profit necessarily. The risk appetite envisages the investor’s risk tolerance. Can Nigerians afford to handle the volatility of currency movements? Would they be perturbed when they realize they bought at the top as the naira appreciates?

So, what’s the way out? Certainly not saving cash. As billionaire investor Ray Dalio puts it, “Cash is Trash.” Cash offers no real return or yield and is negatively impacted by inflation. The investment objective of Nigerians is valid, however, the real hack is earning in gold. The global financial crisis of over a decade ago (2007) had a drastic impact on the lives of a lot of people that many may never forget. Especially the extended stock market meltdown that happened immediately. Investors lost substantial amounts of money that a lot decided never to invest in stocks again. Recent happenings recorded in the global market are creating the fear that there might be a repeat of the same economic crisis and people have started looking out for a more secured and stable, crisis-proof investment opportunities. The type of asset that comes with this kind of protection is Gold.

Therefore, in line with this, it is pertinent to state the advantages of investing in gold in Nigeria, which are;

Gold is risk-free: Except for treasury bills and sovereign bonds that are supported by the full trust of the government, gold is the only asset class that is risk-free. People who are preparing for a comfortable life after retirement crave for a dependable portfolio. They want to avoid the likely hassles when the economic situation suffers a decline. Gold meets these conditions. It is risk- free and also does not change extensively.

It is inflation proof: Investment in gold bars (tangible gold) is typically not affected by inflation for the reason that it increases in value most of the time more than it can be affected by a price drop and its price gains is always beyond inflation levels, giving its holder positive real returns every time. Even when currencies are devalued, gold will maintain its value in a worst-case scenario if not rise in value.

You can invest with privacy: Buying gold bars is just like buying other commodities. You simply identify a credible buyer and make your purchases. You have no obligation reporting your purchases to any central authority or regulator unlike stocks and other financial instruments. Investment security: It cannot be emphasized enough that gold is well-recognized as a safe investment, especially in troubled financial times. It isn’t really affected the way fiscal assets are affected by the economic cycles due to the fact it does not rely on the stability of the financial or economic system.

In conclusion, if well harnessed, gold will liberate the Nigerian economy from solely depending on crude oil as it has the ability to generate more revenue than crude oil. Gold, being a leader in the precious metals market, gets overpriced when the price of crude oil falls. According to the Nigeria Mining Growth Roadmap, Nigeria’s gold reserve is estimated at 200 million metric tonnes. An economic analyst, Basil Enwengbara, said what Nigeria needs is to industrialise the economy“The gold issue is good because it can bring more revenue and also boost the scarce foreign reserve”.