In this piece, Temitayo Jaiyeola explains why startup fundraising in dollars has failed to impact Nigeria’s foreign exchange earnings
The dollar is the queen on the chess board of the Nigerian economy. It determines the worth of the local currency, naira, and ultimately affects values of commodities and services.
The naira is not a tradable currency on the global scene, which is why its value is often pegged against a foreign currency.
In relation to international trade, when the dollar is in short supply, the naira loses value, and when the dollar is in excess supply, the naira gains value. And because local manufacturers are majorly dependent on the importation of machinery and other inputs, the presence or scarcity of the dollar in the economy can be an indicator of its health.
A report on the ‘CBN Journal of Applied Statistics Vol. 6 No. 1(b) (June, 2015)’ by David Olayungbo and Kehinde Ajuwon stated, “Since the 1980s, the U.S dollar has increasingly been usurping the legal role of the naira as the medium of exchange within the Nigerian markets for foreign exchange, savings and commodities.
“In addition, there is an economic law that explains why the U.S dollars and other financial convertible currencies of the west can thus encroach quite vicariously in the domestic turf of the naira in Nigeria. It is called the dollarisation theorem. Dollarisation in Nigeria is a situation which occurs where the residents use foreign currency (US dollar) along with their own domestic currency.”
Getting and retaining the dollar in the Nigerian economy is so important that about a year ago the Central Bank of Nigeria offered to pay people in the Diaspora to bring the dollar into the economy.
Nigeria earns its dollar majorly from crude oil sales, diaspora remittances, and foreign investments.
Ideally, when the price of crude oil rises in the global market, Nigeria gets an influx of dollars. This often ensures that manufacturers, travellers and others can have access to the greenback.
However, an overlapping economic crisis, crude oil theft, huge debt servicing, and others have impacted Nigeria’s ability to attract and retain dollar earnings, putting profound pressure on the naira.
FDI has fallen to new lows, and oil has failed to meet its revenue target despite a surge in global oil prices. Diaspora remittances are the only source of foreign exchange doing well, with the World Bank projecting an increase in inflows because of harsh economic realities in the nation.
The global bank projects that Nigerians in the Diaspora will send more money home to support their families and friends.
Yet, despite a general reduction in dollar inflows into the nation’s economy, its tech ecosystem has been witnessing a surge in foreign exchange earnings.
Funding for the Nigerian and African tech ecosystem has surged with the number of startups securing investment increasing by 351.2 per cent since 2015, according to a report by Disrupt Africa.
Between 2020 and 2021, the ecosystem broke the $1bn and $2bn ceiling. Nigerian startups in particular have raised $3.6bn since 2019, based on data from the ‘Africa: The Big Deal’.
This is a little shy of the $3.8bn that startups in northern and eastern Africa raised in the time under review. Startups in the country have raised about $2m per day since the beginning of 2019 cementing their place as a source of FDI.
Every other day, startups announce fund raises and people converse about how the space is awash with dollars.
But according to experts, most of these raises do not necessarily impact the nation’s dollar inflows. They said the nation only smelt the aroma of the currency but was not filling its belly with it.
“More often than not, when funds are raised, Nigerian or African startups keep them in US banks. If you want to bring them in as official, CBN will have you change them at the official rate,” the founder of Lendsqr and a trustee of Open Banking Nigeria, Adedeji Olowe, stated.
Explaining further, the Founder, Eko Innovation Centre, Victor Afolabi, said, “When you raise money, you will raise it into your headquarters. Almost all the companies raising funds are not headquartered in Nigeria.
“When they raise funds, the people who make the payments, make them those environments. So, what you see is those funds being raised on paper, and not necessarily domiciled in our economy. They bring in this money in bits, to pay salaries, but most of what they raise is domiciled in offshore locations.
“One of the reasons why we are not feeling the intense liquidity based on the raises is because most of the funds are not in our environment. This is one of the realities, and, of course, there are many other reasons why this happens.
“The funds are not a direct injection into our economy. They do not come directly into our financial system and if they don’t come into our financial system, they do very little in terms of helping the economy. What they can do is to increase their operational expenses in terms of employing more people, getting bigger offices. But in terms of really bringing money in to do investment projects, it is not really in our environment. It is why despite all the huge raises, most of the funds are not in the financial system of most African countries, and this is not peculiar to Nigeria.
“They move money in and out, but the real resource is either in Delaware or somewhere else.”
For the co-founder of Truq, Folusho Ojo, the funding would count as FDI since it must eventually get spent in the nation and contribute to the bottom-line. She stated that the funding often came in as dollars or whatever currency it was being raised in.
She noted that most start-ups had domiciliary accounts and since the money would stay here, it also impacted the economy as the founder exchanged this money when the need arose.
Ojo said, “A lot of times, the funding comes in from foreign investors, so sometimes because of the convenience of being able to transfer this money, they use a US bank account. It also depends on the investor, really.
“If it is a foreign investor, they might be fair and use a bank that’s very easy for them to be able to transact with and if it is a local investor, of course, it might be like a domiciliary account and all of that but in instances where it is a foreign account, of course, the money still comes back to the country either way.
“They might just hold it there or bring the money based on when the need arises, when expenses arise.”
In 2021, FDI fell to $6.7bn from $9.7bn in 2020, the lowest since 2016. Nigerian startups and others in Africa raised $3.1bn in the first six months of 2022. According to different tech experts, the tech ecosystem is going to break a new raising record this year.
Economic experts have projected that FDI into Nigeria will continue to fall. It has fallen from $8.49bn in the first quarter of 2019 to $1.57bn in the corresponding quarter of 2022.
Speaking on how the nation can benefit from its booming tech sector, Senior Special Assistant to the President (Digital Transformation) and lead, Nigeria Start Up Bill, Oswald Osaretin Guobadia, said, “We have people driving policies that support start-ups.
“A lot of companies that have raised money have done so as foreign companies and when we look at the reason why they do that, it is because the investors need to be incentivised or assured that IP protection, the laws, and environment are conducive to ensure that they get their returns on investment.
“This is ultimately where the Nigeria Startup Bill comes into play. The bill ensures that we create an environment that makes it incentivised and conducive for people to invest locally in Nigeria. It is basically not punishing local money. It will help local investors to invest more.
“The investment is not happening in naira and the companies are not going to the Nigerian Stock Exchange. Naira is money as well. When we look at the environment we admire, the United States and some European countries, we will see that there are laws and regulations in place that enable investors to feel comfortable investing their equity and get a return on investment. That is why it is critical to create that environment.”
He explained that there was a need to deliberately create an environment where intellectual property would be protected and believed.
He added, “So yes, people are getting investment, but these investments are not touching GTB, Ecobank, Sterling, and the likes. They are sitting in a bank in America with a company registered in Delaware. People must feel comfortable to invest. It is critical to create an environment that enables them to invest in Nigeria so that the economic value is felt.
“What the NSB tends to do is to plant seeds in certain areas, woo investors, both local and foreign, make people want to invest in Nigeria.”
Tech is booming, the dollar is flowing, and investors are smiling. The African tech ecosystem is in its infancy stage. Only seven startups on the continent are worth $1bn and above, implying that the surface has not yet been scratched.
Some investors are just discovering the continent’s potential, others are committing to more. This sector will be to the dollar what bees are to honey, but it remains to be seen if policymakers and central banks will wake up and create a funnel that ensures this honey sweetens the economy.
