Boosting Nigeria’s FDI

Chris Uba
In its latest report released recently, the Nigeria Employers’ Consultative Assembly (NECA), expressed concern over the slowdown of Foreign Direct Investment (FDI) inflow into Nigeria, last year.

Quoting from the United Nations Conference on Trade and Development (UNCTAD) Investment Report, NECA noted that FDI inflow to Nigeria dropped from US$3.5 billion to US$2.2 billion in 2018, representing a reduction of 36 per cent in the previous year. Surprisingly, Egypt, South Africa, Ghana and Ethiopia experienced positive inflow and, now, fast becoming the preferred destination for FDI in Africa.

In contrast, Nigeria, Africa’s largest economy and a top oil producer, saw FDI drop 36 percent to $2.2 billion in 2018. This decline saw Ghana overtake Nigeria as country with the highest FDI in West Africa, recording an inflow of $3.3 billion.

Similarly, Egypt was Africa’s biggest recipient of FDI in 2018, registering an inflow of $7.9 billion, a 7 percent increase over the $7.4 billion received a year earlier. According to UNCTAD, investment inflow was in real estate, food processing, oil and gas exploration and renewable energy even as Ethiopia was the largest recipient of FDI in East Africa in 2018, despite a 24 percent fall in investments to $3.1 billion. According to UNCTAD, major investments in the country were in petroleum refining, mineral extraction, real estate, manufacturing and renewable energy.

In the same period, South Africa received FDI amounting to $7.1 billion in 2018 from $1.3 billion in 2017. FDI inflow which had fallen since 2014, recovered in 2018, with large investments in mining, food processing, petroleum refining, information and communications technology, as well as renewable energy.

While some policy decisions were blamed for Nigeria’s poor FDI inflow in 2018, UNCTAD expects 2019 to be better for the country, especially due to some significant Greenfield project announcement in the oil and gas industry.
Already, recent report shows that FDI inflow to Nigeria increased by US$1150.51million in the first quarter of 2019. It has averaged US$1240.22 million from 2007 until 2019, reaching an all-time high of US$3084.90 million in the fourth quarter of 2012 and a record low of US$314.44 million in the fourth quarter of 2018.Estimated at US$ 99.6 billion in 2018, the total stock of FDI represents 25.1 per cent of the country’s Gross Domestic Product (GDP).
The slowdown in FDI was blamed partly on the 2019 elections, which inevitably heightened risk in the economy. And this had all manner of implications for the macro economy.

One of the negative consequences of this was that portfolio investors voted with their feet as they moved their investments quickly outside to safer climes and this had immediate and direct negative implications on the performance of the stock market as all the critical indices were in the negative territory.
Market capitalisation was reported to have haemorrhaged up to N1.9 trillion last year alone, depicting the extent of loss on investors’ assets.

According to investment analyst, Dr Boniface Chizea, “no wonder the market assumed a bearish character but already one reads that life is returning to the stock market.
“With so much portfolio investments returning to the economy, this would most certainly give a boost to our foreign reserves position and contribute to stabilising the naira exchange rate.”

UNCTAD said progress in the implementation of the Africa Continental Free Trade Agreement (ACFTA), diversification in Greenfield projects targeting the manufacturing sector and the stabilisation of commodity prices show that FDI in Africa could potentially grow in 2019 at a higher pace than the six per cent recorded in 2018.

But it is only those countries that have put their acts together that can attract more FDIs. What this translates to, therefore, is that Nigeria must do more to be the number one destination for FDI inflow in Africa.

This should be so when viewed against the backdrop of role of the FDI in economic development of nation-states. It is for this reason that multilateral agencies including the International Monetary Fund (IMF), the International Financial Corporation (IFC) and African Development Bank (AfDB) underscored the importance of FDI as a strong variable in economic development especially for the emerging economies.

It is on record that virtually all the developed economies of the world received huge inflow of foreign capitals during their formative years. Europe which was devastated by the Second World War was reconstructed through the inflow of foreign capitals.

The same can be said of some of the newly developed economies including the Asian Tigers and China, which have remained the highest recipients of FDIs.
For many decades, how to up the inflow of foreign capitals into Nigeria has been part of the policy plank of the various administrations that have ruled this country. This effort is borne out of the belief that huge inflow of foreign capital would put the country’s economy on the part of sustainable growth and by so doing improve the quality of life of the citizenry.

But, regrettably and unfortunately, too, the results of the efforts of the government have been very disappointing. It is, therefore, for this reason that the concern raised by NECA should not be taken with a pinch of salt.
The seismic waves that have characterised the nation’s petroleum sector cannot guarantee rapid economic development of the country as has been evidenced by the continued shortfall in the oil revenue and budget deficits that have persisted over the years. Rapid economic development of country will only occur if Nigeria can build a resilient economy that is based on non-oil sector.

It is for this reason that the ongoing economic diversification effort in the country should be appreciated but this alone does not relegate the place of FDI in economic development. The country needs huge inflow of capitals.
FDI does not just flow in; they have to be attracted through the creation of an environment that offers attraction to the would-be investors.

Yes, with a population of 200 million people, Nigeria is considered a huge market but this is enough consideration for FDI. There are other issues which are factored in among them: poor business environment and macroeconomic instability.
The Nigeria investment environment is of relatively high risk which has been exacerbated with the recent developments in the economy particularly the unfortunate herders/farmers imbroglio, the Boko Haram insurrection and the spate of abductions which have all resulted to an unacceptable level of loss of human lives. This unfavourable situation raised a notch higher because of fears pertaining to the outcome of 2019 general elections in the country.

For any country to sustain FDI flows, she must enjoy macroeconomic stability so that potential investors can have a long-term view of the risk factor in her economy. Where a country does not have such an environment, it is unrealistic to be expecting robust FDI flows and that is the case now with Nigeria. Even when the country is able to achieve macroeconomic stability, her economic environment has to be competitive. This has yet to be seen in Nigeria.

Issues pertaining to availability of requisite infrastructure come into consideration; power supply, roads, water, security of life and property and of course the comparative rate of inflation and sanctity of contracts. And even the level of corruption in the country which is a cost factor is also of important consideration. From the point of view of analysts, if these issues are reviewed, objectively, one would agree that the Nigerian economy is placed in a disadvantaged position with regard to attracting Development Finance Institutions (DFIs).

They said the DFIs that are, now, found in the country, are largely from investors already captive as they are already operating in the country and of necessity would have to invest as it is required to sustain their operation. The impact of lack of commensurate level of flows of FDIs in the country is direct as it constrains the level of growth the country is able to attain and impact the quality of life of the citizenry resulting to the unacceptable designation of Nigeria as the poverty capital of the world displacing Bangladesh.

To really improve on this situation, Nigeria must have continuity of policy. “We must formulate and determinedly implement development plans such as the Economic Growth and Expansion Program currently being implemented in the country,” said Chizea.

“It is also necessary that our politics mature so that elections are confronted with less acrimony and not the current do or die affair which it has become.”

As has been alluded to above, the prolonged poor state of insecurity in Nigeria is another major factor, because it discourages would-be foreign investors. The country spate of violence in the middle belt, between herdsmen and communal farmers; threats of secession in the South-East; and insecurity in the Niger Delta and North-East. No sincere and shrewd foreign investor will be willing to jeopardize its assets in such a volatile and sometimes violent environment; hence the government should, as a matter of urgency find solution to the raging insecurity in the country.

The infrastructure deficit should also be addressed. The huge infrastructure deficit in the country is another major investment deterrent. The organised private sector (OPS) has consistently pointed out that lack of stable power means manufacturers have to rely on expensive alternative energy sources, such as diesel generators. According to the OPS, weak infrastructure is the strongest variable in the high-cost of doing business in Nigeria.

Additionally, many of the would-be foreign investors are fearful that despite a large population, there is no viable market for their products due to the high rate of poverty and unemployment as well as week infrastructure. Given all of these factors, it is not difficult to see why many potential foreign investors prefer other markets like Morocco, Kenya, and South Africa.

The government should provide a more conducive business environment would attract FDI to the country. Government should expand the tax base, reduce red tape, and strengthen the regulatory framework to investment. This will have the effect of making Nigeria’s business environment more attractive, which in turn, would attract FDI.

The Lagos Chamber of Commerce and Industry also stated that some regulatory actions were not consistent with the federal government’s ease of doing business mandate and urged government to take urgent steps to address the problem. The World Bank Doing Business Index is an annual ranking that objectively assesses prevailing business climate conditions across 190 countries based on 10 Ease of Doing Business indicators. NECA wants this be addressed as a matter of urgency.