Unattractive Nigerian economy faces diminishing foreign direct investment

The latest data from the National Bureau of Statistics (NBS) on capital importation show that Foreign Direct Investment (FDI) inflow into Nigeria dropped by a whopping 75 percent between the first and second quarters of this year. Between the second quarter 2023 and the second quarter this year, the drop amounted to 65.3 percent; resulting in only $29.8 million FDI inflow in the second quarter 2024 (Q2 2024) —the lowest in over a decade.

The  NBS data showed that much of the FDI in Q2 2024 came from equity investment — amounting to $29.8 million — representing a sharp decrease of 75 percent compared to $119.17 million recorded in Q1 2024. On a year-on-year basis, the FDI declined by 65.33 percent from $86.02 million in Q2 2023. These significant declines depict the challenges the Nigerian economy faces in attracting long-term investment in a very tough global economic environment and numerous domestic issues.

In the whole of 2023, FDI inflow into Nigeria fell by 26.7 percent to $3.9 billion, from $5.3 billion in 2022. This was essentially due to political risks and elevated uncompetitive operating environment. Ten years ago, in 2013, Nigeria recorded FDI inflow of $5.56 billion; it attained a ‘peak’ of $8.84 billion in 2011 — and has kept recording declines.

Globally, FDI flow has come to be an unofficial vote of confidence (or otherwise) on various economic jurisdictions — with more inflow depicting a healthier and more attractive investment climate. Thus, FDI by definition, could mean an ownership stake in a foreign company or project made by an investor, company, or government from another country.

Unsurprisingly, while FDI inflow into Nigeria has kept declining, the Foreign Portfolio Investment (FPI) component of capital importation into the country has been regaining buoyancy. Indeed, with the virtual drying up of FDI in the first half 2024 (H1 2024), FPI and ‘other’ components beefed up the overall capital importation. Thus, in H1 2024, total capital importation into Nigeria stood at $6.0 billion.

However, further decomposition of this figure only suggests a strong recovery in “hot money” or FPI flows. This trend being a function of improvement in sentiment spurred by improving yield environment, sequel to consistent hikes in interest rates by the monetary authorities. Thus, in Q2 2024, FPI alone accounted for 54 percent of total capital importation. Foreign currency loans also came in to push up capital inflows, despite the downturn in FDI.

This reflected in Q2 2024 where Nigeria recorded a total capital importation of $2.60 billion of foreign currency loans, which include portfolio investments; and direct loans contributed $2.55 billion, representing 98.08 percent of the total inflows. The preference for loans is obviously as a result of investor caution, with foreign investors choosing safer financial instruments (e.g. FGN Treasury Bills) rather than committing to long-term projects via FDIs.

It is a no-brainer therefore that Nigeria’s capital importation is dominated by foreign currency loans (in dollars and others) and short-term investments and debt instruments. These inflows provide only temporary liquidity (since FPIs are ‘hot money’) but do not offer the macroeconomic stability that makes for economic growth and development.

In truth, the Nigerian investment climate is yet to be competitive vis-à-vis other economic jurisdictions. It is still a highly volatile milieu, underlined by uncertainty borne out of subsisting policy somersaults, prevarications and tergiversations on the part of the officialdom. This ominous trend is amply reflected in the state of virtually all economic indicators — which are showing outcomes contrary to the government’s expectations.

In a space of one year, the rate of inflation, for instance, has assumed a runaway trend: jumping from 22.70 percent in June 2023 to over 34 percent in June 2024. The dynamics driving this trend remain yet unsubdued; which is why despite a marginal drop to 32.15 percent in August, the inflation rate resumed an upward jump in September — hitting 32.70 percent. One of the core drivers of the high inflationary trend, namely food inflation — rose from 37.52 percent in August to 37.77 percent in September.

This high and yet rising inflationary trend has not only thoroughly weakened consumer purchasing power, it has also led to huge (unsold) inventories on the part of producers/manufacturers. The high inflation is essentially owing to the ‘cost-push’ effect arising from high cost of funds: either as loans due to high interest rates regime or imported inputs procured with dollars from the forex (FX) market where the Naira is badly hit.

In point of fact, the government would appear to have come to its wits end in the efforts to attain (even if only) stability in the FX market. In a space of one year, the market has seen the good, the bad and the ugly, and yet the Naira rate against the dollar keeps moving like a yo-yo. Today, in the ‘official’ market, the exchange rate is about N1,700/$. This is very troubling; and remains a critical disincentive to businesses and investors — both local and foreign.

Fuel subsidy removal — and its attendant unending surging fuel prices (from below N200 per litre in May 2023 to now over N1000 per litre) has become an existential threat to not only businesses but also all economic agents. As the rising fuel prices feed into cost of transportation, high electricity tariff and sundry taxes and levies: all lead to more impoverishment, pain and hardship for all economic agents.

At the background of all these is the lingering insecurity in all nooks and crannies of the nation; a worsening condition that has sent millions of citizens into internally displaced peoples (IDPs) centres across the country. Farming and farmers have practically become endangered species, especially in many of the places widely referred to as the ‘food baskets’ of the nation. Bandits and banditry loom large.

Same phenomenon affects the mainstay of the nation’s economy — crude oil sector — where massive theft has come to leave only a little of that national ‘common asset’ for national use. And this is why for quite a while, rather than improving, the level of production of crude has been either stagnant or declining. Despite the fact that Nigeria’s 2024 budget is based on the assumed crude oil production level of 1.78 million barrels per day (mbpd), as of September 2024 the country could only produce 1.32 mbpd!

In all, the poor investment climate and low-ranking ‘Ease of Doing Business’, accentuated by the horrible outcomes of recent economic policies, are sure ways of scaring away both local and foreign investors. All these qualify as ‘how not to attract FDIs’ in a world that is a global village. At best, Nigeria’s volatile environment qualifies only as a very temporary domain for ‘hot money’; which is why some modicum of FPIs have been attracted. But in the end, to what end?

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