Nigeria operated an exchange control regime, which gave way to deregulation of the foreign exchange market in the wake of the Structural Adjustment programme adopted in 1986. Since then, other legislations such as Foreign Currency (Domiciliary Account) Act, the Second-Tier Foreign Exchange Market Act governed capital flows management. However, with the enactment of the Foreign Exchange (monitoring and Miscellaneous Provision) Act 1995 all previous legislations were repealed. The FEM Act sought to make Nigeria attractive for inflow of foreign investment. It established and Autonomous Foreign Exchange Market (AFEM). Some of its salient provisions include:
i   Non-disclosure of sources of imported foreign currency except as may be required
under any enactment or law (e.g. Money Laundering Act).
ii. Transactions at mutually agreed rates between the parties involved.
iii. Eligible transactions should be supported by appropriate documentation.
iv. Investment in any enterprise or security in foreign currency permissible.
v. Authorized dealers must issue certificate of capital importation within 24 hours and advise the CBN within 48 hours thereafter.
vi. Guaranteed unconditional transferability of foreign currency invested in freely convertible currency in the form of:
Dividends or profits (net of taxes) attributable to the investment; Payments in respect of loan servicing where foreign loan had been obtained; and
c) Remittance of proceeds (net of all taxes) and other obligations in the event of sale or liquidation of the enterprise or any interest attributable to the investment.
The FEM Act is largely foreign investor-friendly. It is further complemented by the Nigerian Investment Promotion Commission (NIPC) Act, 1995, whose primary mandate was to encourage, promote and coordinate investment in the Nigerian economy. In particular, NIPC was expected to initiate and support measures, which shall enhance the investment climate in Nigeria for both Nigerians and non-Nigerian investors.
An objective appraisal will suggest that the legal provisions are largely adequate if faithfully implemented by all stakeholders. However, concerns have been expressed with regard to inadequate infrastructural facilities such as power, water supply, motorable roads as well as insecurity of life and property as inhibiting factors in attracting capital flows.
Developments in Respect of Capital Flows in Nigeria
Like in other LDC’s the desire to accelerate the pace of economic growth and development in Nigeria necessitated the quest for external capital flow to complement the variable domestic capital. By 1950s, industrial nations and multilateral agencies also started extending official assistance to Nigeria.
In recognition of its importance and role in the nation’s economic growth process, the government has over the years put in place series of policies and incentives to attract external capital into the country For instance, the government expressed its readiness in the 1997 budget, to enter into investment protection agreements with foreign governments or private organizations wishing to invest in Nigeria, as well as discuss additional incentives with prospective investors. In that regard, the government established the Nigerian Investment Promotion Commission, as a one-stop agency that would facilitate the inflow of FDI into the country. The industrial Development Coordination Committee (IDCC) was established in 1998 for the purpose of fostering a conducive regulatory environment and serve as the first port of call to potential investor. The Nigerian Investment Promotion Act No. 16 of 1995 reflected the new enhanced liberal foreign investment policy of government. There were also tax related incentive measures such as: pioneer status; tax relief for research and development, which provides for a graduated amount of tax-allowances to be deducted from profit; company income tax, which has been amended to encourage potential and existing investors; tax-free dividends as well as tax relief for investments in economically disadvantaged local government areas (Salako & Adebusuyi, 2001).
The Debt Conversion Programme (DCP) was also introduced as a major vehicle for the inflow of foreign investment. The Privatization and Commercialization Programme through which government disengaged from activities that could be effectively undertaken by private sector was among others meant to encourage the inflow of foreign investment. Similarly, the establishment of export processing zones was aimed at attracting more foreign investments through provision of infrastructural facilities and elimination of bureaucratic bottlenecks. The repeal of the Nigerian Enterprises Promotion Decree (NEPD) of 1972 and the Exchange Control Act of 1962 were aimed at making the investment climate more conducive for foreign investors.
The recent debt relief by the Paris Club was a major development in the management of the country’s capital flows. With that development, the country should be able to free itself from the huge debt burden that had hitherto impacted negatively on the country’s credit rating, slowed down the rate of growth and development as a result of huge resources devoted to i debt servicing, among others.
However, these measures are observed not to have yielded the desired results in terms of attracting FDI inflow, in particular. For instance, aggregate FDI inflow into Nigeria through existing foreign/jointly owned companies during the 1970’s averaged US$562.3 million yearly in nominal tern (Salako & Adebusuyi, 2000). As a proportion of the Gross Domestic Product (GDP), it accounted for 3.6% during the period. Before the introduction of the Structural Adjustment Programme (SAP) in 1986, total foreign investment inflow for 1 980s averaged US$178.2 million annually and represented 4.3% of GDP. During the period 1987-1990 average annual foreign investment inflow rose to US$183.6 million, representing 3.0% of GDP, while the average inflow was S$15,402.5 million or 1.4% of GDP during 1991 – 1998 (Salako & Adebusuyi, 2001). Specifically, Nigeria has not benefited significantly from this vital resource during the last two decades in spite of its high potential for the attraction of foreign investments because some aspects of its investment policies have not been generally investor-friendly.
Regulatory Institution and Capital Flow Management
In order to appreciate the role of the regulatory institutions in the management of capital flows in Nigeria, it is pertinent to identify the relevant regulatory institutions involved in the issues of capital flows, their broad objectives in relation to capital flows, the associated risks posed by capital flows and the role of the institutions in managing such risks. In view of the fact that capital flows involve cross — border transactions and are carried out mainly through the financial system, particularly, the banking system, the main regulatory institutions in the case of Nigeria will include the Federal Ministry of Finance, the National Planning Commission, the Nigeria Customs Service, the CBN, SEC, FIRS and the Debt Management Office as well as the law enforcement agents such as the Nigeria Police and the Economic and Financial Crimes Commission (EFCC) among others. These regulatory institutions would aim at achieving the following objectives in relation to capital flows:
Attain optimal level of capital flow that will ensure the achievement of the desired investment level with a view to accelerating the pace of economic growth and development;
Ensure the safety, soundness and stability of the nation’s financial system;
Ensure price stability, that is, ensure the stability of general prices of goods and services, exchange as well as interest rates in the domestic economy;
Ensure the protection of investors; and
Minimize the incidence of financial crimes associated with capital flows.
Paving identified the regulatory institution and their broad objectives in
• to capital flow, the next logical step is to highlight inhibiting factors other direct and indirect) against capital flows and which could threaten achievement of the regulatory objectives. Some of these factors include:
Money Laundering;
Weak corporate governance in banks;
Malpractices in Foreign Exchange operations;
Over-invoicing or under-invoicing of imports;
Overheating of the economy; and
Financial system instability
In order to promote capital flows, the regulatory institutions should evolve appropriate means of monitoring and verifying the genuineness of capital flows. The role of the institutions in that regard will involve the adoption of wing tools:

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Adoption of Sound Monetary Policy
Where the net capital inflow into a country exceeds the absorptive capacity of the economy, the monetary authorities should adopt appropriate monetary policies to sterilize the excess funds in order to forestall overheating of the economy, which directly threatens the attainment of price stability. The use of open market operation, and reserve requirement become instruments of monetary policy to manage such excessive net inflow.
Effective Supervision
All the relevant regulatory institutions, particularly the CBN and the NDIC should strengthen their supervisory capability by ensuring strict compliance with the applicable regulations on capital flows. In particular, restrictions could be placed on the quantum of short-term capital as this is highly volatile and could threaten stability of the banking system. A good number of large banks in the East Asian countries were driven to the brink of insolvency in the 90s as a result of large volume of inflow of short-term capital, which turned out to be highly volatile. Besides, where banks engage in cross border transactions, the regulatory institutions should ensure that the capital base of such institutions is adequate to support the additional risks being carried by such financial institutions, in other words, the regulatory institutions should enforce sound capital requirements. This is in addition to the fact that banks should be compelled to put in place appropriate risk management systems in order to align their regulatory capital more closely to their economic need for capital. The ongoing strengthening of risk management capability of banks through the issuance of guidelines by the CBN for the development of risk management frameworks in banks is a step in the right direction.
Given the critical role of banks in the management of capital flows certain measures were adopted since the late 1 990s to promote optimal capital flows in the financial system. Such measures included: establishment of open foreign exchange positions for each bank; mandatory issuance of certificate of capital importation within 24 hours;
Approval of money transfer products such as Western Union, Money Gram, et cetera. uninhibited remittance of dividends;
access to foreign currency loans from multilateral institutions like IFC, ADB, Afrexim Bank, US Exim Bank for on — lending; Utilization of unconfirmed letters of credits for industrial raw materials.
In spite of the afore-mentioned measures, foreign exchange leakages through the parallel foreign exchange market constitute a major challenge to the effective management of capital flows. Combating the unwholesome parallel market foreign exchange activities requires close collaboration between the bank regulators and the law-enforcement agencies.
Strengthening of the Financial Superstructure
A healthy domestic banking system is a pre-requisite for ensuring an optimal capital flow in any economy as it improves a country’s attractiveness to foreign investors. The Nigerian economy, like many other developing countries, prior to the on—going banking reform programme, had many weak and a relatively underdeveloped financial system. The banks had small capital base. The banking system was also prone to carrying excessive credit risks by having large proportions of non-performing loans and advances. As a consequence it would not take more than a marginal shift of funds in the massive and fluid international markets to overwhelm the absorption capacity of these banks. In fact, a handful of individual private institutions can also recall the Asian crisis when as the funds flowed in the prospect of healthy expansion soon became a bubble. Something triggered an outflow, lenders ran to the door, and a financial crisis resulted.
The on-going banking sector reform programme which aims at strengthening Nigerian banks to more meaningful protect depositors, play developmental roles in the nation’s economy, and become a competent and active player in the Africa regional and global financial system will enhance the capacity of banks to absorb shocks that cross-border transactions could cause. The banking sector reforms have occasioned the increase in the required capital base of banks to N 25 billion through consolidation. The reform will among other things, promote soundness, stability, and enhance the efficiency of the institutions. A stable, sound and efficient banking system will, overtime, guarantee higher returns to shareholders or portfolio investors.
Strengthening Corporate Governance Practices Responsive corporate governance remains a critical success factor for the viability and survival of banking institutions. Many banks in the country are yet to imbibe the cannons of good corporate governance. The apparent lack of transparency and accountability on the part of some operators may make tracking of capital flow a lot difficult thereby making its management a herculean task.
Given the foregoing, the regulatory authorities should review the existing code of conduct for Directors of licensed banks to include highest standard of ethical conduct and behaviour and create a conducive environment for whistle blowing. In this regard, the whistle-blowing legislation has to be pursued with vigour. Guidelines to monitor conflict or likelihood of conflict of interest should be issued in collaboration with other stakeholders. A zero tolerance for unethical behaviours and breaches of rules and regulations must be strictly enforced. Generally, sanctions should be targeted at the directors and officers rather than the institutions.
Effective Co-ordination of External Debts. Experience has shown that the economy became neck-deep in external debt problems by the lack of effective co-ordination by successive administrations in the country. As a result, many external debts were contracted for projects whose feasibility studies were suspect and hence many were not available such that the determination of the exact quantum of external debts of the country became a debatable issue. This made management of capital flows from this source difficult. The present administration, since inception has given due recognition to this problem and has taken some pragmatic steps at addressing the issues. One of such efforts was the creation of the Debt Management Office. The Office was charged specifically with the Management of all public debts, including the external debts. Recently, the Federal Government, through the activities of the Hon. Minister of Finance and the Debt Management Office was able to secure a major debt relief for the country. The establishment of DM0 will guarantee effective co-ordination of this source of capital flows in the country.
Thorough Inspection of Imported Materials
One of the means through which many developing countries, including Nigeria, experienced capital flight is over invoicing. This requires that the Nigeria Custom Service should address this challenge through thorough inspection of imported materials so as to determine the actual value of what is imported. This requires capacity building in the form of skill enhancement and acquisition of necessary infrastructures. It also requires close collaboration between our custom officials and their counterparts in the countries of origin of the imported items.
Strict Enforcement of Laws
The law enforcement officers are constantly being challenged by the frequent incidences of threat to life and property, perpetration of financial crimes such as money laundering, outright fraud and corruption. Every investor, local or foreign, requires conducive socio-political environment where there is absence of bribery and corruption, effective enforcement of property right, and security of life and property, among others. Nigeria is generally believed not to have a good record on these variables and this has accounted for her relative unattractiveness to foreign investors, donors and creditors. Using the frequency of corrupt payments, the value of bribes, and the resultant obstacles to business, Transparency International has consistently ranked the country as one of the most corrupt countries in the world. Corruption tends to raise transaction costs, increase uncertainty and instability Directly related to this is the problem of advance fee fraud for which Nigerians have become notorious. Threats to lives and property have become a common phenomenon through the activities of armed robbers and ethnic militia. These vices reinforce uncertainty, instability and increase risk thereby adding to the risk of investing in Nigeria relative to other countries. There is therefore the need for our law enforcement agencies such as the NJ Police and the Economic and Financial Crimes Commission to strictly enforce the relevant laws in order to reverse the negative image problem.
It is instructive to note that the present administration has never hidden its determination to stamp out from our national life, corruption, nepotism and other practices that compromise transparency, accountability, and probity. The establishments of the Independent Corrupt Practices Commission (ICPC) in 2000 and the Economic and Financial Crimes Commission (EFCC) in 2002 are notable efforts geared towards eradicating corruption, money laundering and other related crimes. So far, these Commissions have addressed cases involving highly placed individuals in society. At the moment, the international community is beginning to acknowledge the seriousness of government in this regard, and hopefully, it will assist in attaining the optimal level of capital flow. These efforts should therefore be sustained.
An attempt has been made in this chapter to highlight the role of the relevant regulatory institutions in the management of capital flows in Nigeria. The chapter has described capital flows to consist of foreign direct investment, portfolio equity and debt flows, commercial lending and official flows. The paper also identifies the concerned regulatory institutions to include the Federal Ministry of Finance, the Nigeria Customs Service, CBN, NDIC and the Debt Management Office as well as the law enforcement agents as the Nigeria Police and the Economic and Financial Crimes Commission (EFCC). While capital flows in any country has its obvious merits, there is the need to ensure their effective management in order to minimize the associated risks by such flows to the regulatory objectives.
These objectives have been identified in the chapter to include the attainment optimal level of capital flow that will ensure the achievement of the desired investment level with a view to accelerating the pace of economic growth and development; ensuring the safety soundness and stability of the nation’s financial system; ensuring price stability in the domestic economy; ensuring the protection of investors; and minimizing incidence of financial crimes associated with capital flows. The paper concludes with the specific roles of the regulatory institutions in the management of capital flows in Nigeria. Some of these roles include effective supervision, adoption of sound monetary policies, strengthening the financial superstructure, strengthening corporate governance practices, strict enforcement of laws and effective co-ordination of external debts. It is our belief that efforts in the direction of measures indicated above will go a long way in ensuring that the economy derives the expected maximum benefits from capital flows.