Nigeria’s FDI must hit 2008 levels to boost growth –Economists

According to economists, lack of reforms which has culminated in weak economic growth, foreign exchange volatility and a harsh business environment are some of the reasons Nigeria has struggled to attract sufficient foreign investments since 2015. They concluded that the economy won’t record serious growth until Foreign Direct Investment (FDI) into various sectors of the economy starts growing at the rate recorded in 2008. PAUL OGBUOKIRI reports


Foreign Direct Investment (FDI)


Foreign Direct Investment (FDI) refers to direct investment equity flows in the reporting economy. It is the sum of equity capital, reinvestment of earnings, and other capitals.


Direct investment is a category of cross-border investment associated with a resident in one economy having control or a significant degree of influence on the management of an enterprise that is resident in another economy.


Ownership of 10 per cent or more of the ordinary shares of voting stock is the criterion for determining the existence of a direct investment relationship.


According to Ayo Teriba, Chief Executive Officer (CEO), Economic Associates, up to the early 90s, Nigeria had a larger stock of FDI than India, South Africa or the United Arab Emirates but they have since overtaken Nigeria, with India now having more than triple, and Saudi Arabia having more than double of Nigeria’s FDI stock.


“Nigeria must join the liquidity race and regain its place among peers. The main weakness over the years is that low levels of foreign reserves leave the system uninsured against external financial shocks, weakens the Naira exchange rate, and makes assets denominated in Naira poor stores of value and wealth .


Nigeria needs to wake up,” the economist said. Nigeria, which used to be the top investment destination of the world in 2008, recorded $8.19 billion which was 2.43 per cent of the GDP; in 2009, the FDI stood at $8.56 billion which was 2.93 per cent of GDP.


In 2010, the country recorded $6.03 billion foreign direct investment which was 1.67 per cent of GDP. It was $8.841 billion in 2011; 2012, $7.07 billion and $5.564 billion in 2013.


But in 2014 when the election fever had gripped the nation and investors had started adopting a wait and see approach, the FDI fell to $4.694 billion.


The downward trend continued in 2015 as the foreign investment fell to $3.064 billion. It rose slightly by about $400 million in 2016 to $3.453 billion. It fell further to $2.417 billion in 2017, which was 0.64 per cent of the GDP.


In 2018, it fell to an all time low to $780 million which was 0.20 per cent of the GDP.


In 2019, it rose again to $2.31 billion which was 0.51 per cent of the GDP; in 2020 it rose by 4 per cent to $2.4 billion.


Foreign investment continues falling


In the second quarter of 2021, Nigeria managed foreign investment worth $875 million, the lowest amount recorded in a single quarter since the first quarter of 2016 when Nigeria slipped into its first recession in a quarter of a century.


According to the NBS report, foreign direct investments fell 36 per cent to $232.74 million as against $362.84 million recorded in the corresponding period of the previous year.


Foreign portfolio investment (FPI) declined 67 per cent to $1.53 billion, from $4.69      billion recorded in the first six months of 2020, while other investments halved to $1.02 billion from $2.09 billion in the review period.


According to the Chief Economist for Africa at JP Morgan, Mr. Ayomide Mejabi, lack of reforms which has culminated in weak economic growth, foreign exchange volatility and a harsh business environment are some of the reasons why Nigeria has struggled to attract sufficient foreign investments since 2015.


He said that policy inconsistency also ranks tops as a major deterrent to foreign investment. He added that the trend of declining foreign investment, particularly FDI, is a worry for Nigeria which is in dire need of private capital to boost economic growth and create jobs.


He stated that Nigeria needed to rise to 2008 levels for the economy to record appreciable growth.


Nigeria’s net FDI inflows as a percentage of GDP were 0.5 per cent in 2019, according to World Bank data, that compares with South Africa’s 1.5 per cent and Ghana’s 5.8 per cent, a sign Nigeria is attracting very little FDI for its economic size.


According to LCCI’s former directorgeneral, Muda Yusuf, diverse institutional, regulatory and structural challenges had eroded investors’ confidence in the Nigerian economy.


Specifically, Yusuf said: “It is investors’ confidence that drives investment, whether domestic or foreign. Investors are generally very cautious and painstaking in taking decisions with respect to Foreign Direct Investment (FDI).


“This is because FDIs are often long term and invariably more risky, especially in volatile economic and business environments. Uncertainties aggravate investment risk. Investors in the real sector space are grappling with structural problems especially around infrastructure.”


Yusuf, therefore, identified key areas of the troubled economy that completely eroded confidence, especially since 2015 when President Muhammadu Buhari took over the leadership of Africa’s biggest economy.


He noted that there, “are grave concerns about liquidity in the forex market. There are concerns about the accelerated weakening of the currency.


There are issues of heightened regulatory and policy risks in many sectors. “Investors’ confidence has also been adversely affected by the worsening security situation in the country. Meanwhile, our domestic economy is still struggling to recover from the shocks of the COVID19 pandemic.


These are the likely factors affecting investment decisions,” he said. He, however, suggested that the country’s ability to attract FDI would largely depend on how its political leadership could position the economy and work out strategies to restore investors’ confidence in the economy.


The LCCI’s former director-general, thus, canvassed the investment climate quality, which according to him would make a huge difference if objectively mapped out and passionately implemented.


He also asked the Federal Government, “to ensure an acceleration of necessary reforms to make Nigeria a much better investment destination. We need policy reforms, regulatory reforms and institutional reforms, among others.


“We should accelerate the ongoing foreign exchange reforms; we need to undertake trade policy reforms to liberalise trade in sectors of weak comparative advantage; we need regulatory reforms to make regulations more investment friendly.


“We need to create new opportunities in the public private partnership (PPP) space, especially in infrastructure.


We need to see more privatisation of public enterprises. It is important as well to quickly fix the ravaging insecurity in the country. All of these are crucial to boost investors’ confidence.”


Egypt, Congo DR displace Nigeria to third investment in Africa


Nigeria emerged as the third largest economy, alongside Ethiopia ($2.4 billion) that attracted FDI inflows in Africa last year. This is contained in the United Nations Conference on Trade and Development (UNCTAD) World investment report 2021. Egypt was the largest recipient of foreign direct investment in Africa in the review year.


However, with a significant reduction of 35 per cent to $5.9 billion in 2020; followed by the Republic of the Congo ($4 billion), while South Africa was fourth with $3.1 billion (a decline of 39 per cent).


According to the report, the COVID-19 crisis caused a dramatic fall in FDIs in 2020 thereby pushing global FDI flows to $1 trillion from $1.5 trillion in 2019 (a decline of 35 percent). It said the level of decrease is almost 20 per cent below the 2009 trough after the global financial crisis.


The UN body said FDI flows in Africa likewise declined by 16 per cent to $40 billion — lowest in 15 years — while FDI outflows fell by two thirds in 2020 to $1.6 billion from $4.9 billion in 2019.


On Nigeria, the report reads: “The average price of crude oil dropped by 33 per cent in 2020, and lower demand along with supplyside constraints caused by the slowdown in site development restricted FDI to the country in the first half of 2020.


“Despite the pandemic, the long-term policy of FDI diversification appears to have had some impact.


“One important greenfield investment ($66 million) in the non-oil economy was the construction of a manufacturing facility in the Lekki Free Trade Zone by Ariel Foods (Kenya). “There was also a significant merger and acquisition (M&A) deal in the same region, with China Communications Construction Company providing the initial $221 million equity injection in Lekki Deep Sea Port, out of a planned total investment of $629 million. “Other transactions that contributed to FDI diversification, such as the investment by Multichoice Group (South Africa) in Betking, a provider of data hosting services, were relatively small.” The report listed MTN’s $1.6 billion investment to strengthen its 4G network services in Nigeria as a major FDI that would boost the nation’s investment going forward.


Way forward


There are a few things Nigeria can do to boost foreign direct investment, says Professor Emmanuel Nnadozie, the Executive Secretary of the African Capacity Building Foundation (ACBF). According to him, for starters, it must play fair. Foreign and domestic businesses should be treated equally.


“They should be open, transparent and dependable for all kinds of firms.” Nnadozie said another area that needs attention is infrastructure, adding that businesses need easy access to ports, an adequate and reliable supply of energy and relative certainty that the country will be good to invest in.


Good institutions also promote FDI, he stated. He further said that the government should encourage partnerships between foreign and local businesses. “Foreign firms might be familiar with global good business practices, but local firms will be more familiar with the indigenous context.


This synergy could be very beneficial. “It’s also critical that Nigeria gets its regional governments involved: there are many regions in Nigeria, and these regions all have unique opportunities and challenges.


Our latest research shows that when the central government of Nigeria ran out of ideas and foreigners wanted to exit the agricultural sector, the regional government of Kwara State stepped in to create a positive business climate based on the cooperation of local banks, community members, and the foreigners themselves culminating in the Shonga farms public-private venture.


“Nigeria should also tap into its huge Diaspora. There are many Nigerians living outside the country who understand its challenges.


They should be encouraged to help, or asked to work with their networks to invest in the country,” he said.


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