In One Of Africa’s Largest Economies, Foreign Investment Is Lagging
To be at par with African peers, Nigeria needs $14 billion in foreign direct investment (FDI), but only managed to acquire only 7 percent of that requirement in 2017, casting a cloud over how Africa’s largest economy will grow sustainably and provide the jobs needed for its ballooning population. In arriving at the $14 billion estimates, the FDI inflows per capita for South Africa, Egypt, and Ghana in 2017 were derived using World Bank data, before an average was found and multiplied by Nigeria’s population of over 180 million.
South Africa’s FDI per capita came to $58, given that it attracted $3.2 billion in FDI in 2017, and is home to some 55 million people. Egypt, with a population of 95 million, was the top destination for FDI last year and attracted $7.4 billion, implying an FDI per capita of $77.8. Ghana, with a population of 28 million, has an FDI per capita of $107, has attracted $3 billion. The average for the three countries was $80.9, which when multiplied by 180 million turned in $14.5 billion.
According to the state statistics agency, the National Bureau of Statistics (NBS), FDI inflows to Nigeria dipped to an 8-year low of $981.7 million in 2017, giving Africa’s most populous nation an FDI per capita of $5.4, underscoring the need for increased foreign investment in Nigeria, which is projected to be the world’s most populous nation after India and China by 2050.
Business Climate, Lack Of Policy Clarity, Aided Decline
Foreign direct investment to Nigeria was spooked by a complex exchange rate regime which was preceded by a naira devaluation, low growth and an unpredictable business environment in 2017, according to Charles Robertson, chief economist at the investment bank, Renaissance Capital.
“Very few investors would plan to bring money to Nigeria when the official exchange rate was N305/$ and the unofficial exchange rate was N360/$ (or weaker). Secondly, investment requires optimism about the future – and low growth in Nigeria has not made many investors very optimistic about the near future. Third, investors need to feel there is a predictable business environment,” Robertson recently told Business Day, a Nigerian business and financial news publication.
“Getting a fully functioning electricity market in place and improving adult literacy would also help a great deal in attracting sufficient FDI. Countries can grow without FDI, but they grow faster with FDI,” Charles Robertson, Renaissance Capital.
Stiff competition among African countries means it will get even harder to attract FDI in the future, with countries like Ethiopia- the most populous nation on the continent after Nigeria- opening up to foreign investment after four decades of state control.
West African neighbor, Ghana, which is about the size of Lagos, is also now punching above its weight and attracting FDI that Nigeria has struggled to match in the past two years amid its economic downturn.
Government policy clarity, public adherence to the rule of law and enforcement of contracts by the government are important to attract the level of FDI Abuja needs, according to Ayo Akinwunmi, head of research at FSDH Merchant Bank.
“The lack of policy clarity contributed to the paltry FDI inflows in 2017, especially given that the policy reforms that would have incentivized FDIs for the oil and gas sector, which attracts the largest FDI, has been stuck for several years,” Akinwunmi said, referring to the Petroleum Industry Bills which seek to address corporate governance issues and ease investments in the sector.
Seventeen years late in coming, the Petroleum Industry and Governance Bill (PIGB) hit a cul-de-sac when President Muhammadu Buhari, declined assent to the bill, alleging it whittles down his powers, in what was a shock to people familiar with the matter.
“FDI is long term and investors need to make decisions today for the future, so they will not commit funds to a country that is highly unpredictable and where policies are inconsistent,” Akinwunmi added.
In the first half of 2018, Nigeria attracted $507.9 million of FDI, according to NBS data, after the economy exited a five-quarter long recession and posted growth of 1.9 percent and 1.5 percent in the first and second quarters of 2018 respectively. Another half-year of the same would see it attract slightly over a billion dollars in FDI, even though recent troubles with one of its largest direct investors may stifle inflows.
A trend of policy inconsistency and poor leadership has left Nigeria short of its true potential to attract FDI. The government has largely inhibited private enterprise rather than encourage it to thrive and that has distinguished it from peers of old. Another indication of how Nigeria has endured a woeful FDI return is when compared with its MINT peers.
Nigeria’s FDI stock in 1995 meant it got off to an almost equal start as its MINT (Mexico, Indonesia, Nigeria, and Turkey) peers, however, two decades later, Abuja has been left for dead by the others.
The term “MINT” was popularized by former Goldman Sachs economist, Jim O’Neil, in reference to Mexico, Indonesia, Nigeria and Turkey, which at the time had favorable demographics and benign economic prospects. The four countries also had comparable levels of FDI.
In 1995, Nigeria’s FDI stock (a measure of the total level of direct investment at a given point in time) was $USD 16.25 billion, ranking it third, behind Mexico’s $41.1 billion and Indonesia’s $20 billion. Turkey had the least FDI stock of $14 billion, according to UNCTAD data.
Enter 2017 and although Mexico and Indonesia still lead the way in terms of FDI stock, Nigeria has fallen off third place by no small margin and is now firmly rooted at the bottom.
Between 1995 and 2017, Mexico’s FDI stock jumped 1,089 percent to $489 billion, while Indonesia and Turkey’s FDI stock surged 1,104 percent and 1,110 percent to $248.5 billion and $180.7 billion, respectively.
Nigeria is almost unrecognizable from when it was second only to Mexico in the 1970s or third in 1995. The country’s FDI stock only grew 500 percent less than half the average of its peers, to $97.7 billion in 2017. That is despite boasting the largest population after Indonesia of the four countries. As a percentage of GDP, Mexico’s FDI stock in 2017 was 49.5 percent compared to 12 percent in 1995, while Indonesia’s FDI stock was 24.4 percent compared to 8.4 percent.
Turkey’s FDI stock as a percentage of GDP was 22.8 percent in 2017 compared to 6.4 percent in 1995.
Nigeria saw a much smaller jump in FDI stock as a percentage of GDP, implying less progress compared to the others, as it went from 12.3 percent of GDP in 1995 to 24 percent in 2017.
Reforms, Proper Execution Are Key
The bottlenecks around project execution especially as it has to do with government and its inconsistencies in policies would be a major challenge and drawback for FDI attraction into Nigeria, even as the inability of the government to allow full deregulation of key sectors is a major impediment to FDI inflow, according to Abiodun Keripe, the group financial analyst at Lagos-based Troyka.
“Deepening reforms that would enable a conducive environment for a private-sector-led economy should be on the front burner for the government,” Keripe said in an emailed response to interview questions.
As of 1995, Nigeria got off to the best start among all four countries but there has been a dramatic change since then. South Africa had an FDI stock of $15 billion, Egypt $14.6 billion and Ghana $826 million, putting Nigeria in the number one spot with $16 billion at the time. By 2017, South Africa’s FDI stock had swelled almost ten times to $150 billion, while Egypt’s FDI stock jumped to $109.7 billion, leaving Nigeria-with FDI stock of $97 billion-in their trail. Ghana was fourth in terms of FDI stock as of 2017, with only $33 billion to its name, but demonstrated a tendency for rapid growth, having seen its FDI stock rise by 3,911 percent from $826 million in 1995.
“It seems this government will give an arm and a leg to attract FPI but it is stifling FDI,” said Wale Okunrinboye, of Lagos-based Sigma Pensions Ltd.“The CBN raised interest rates to 19 percent last year and paid an interest expense of $3.7 billion to attract portfolio investment (FPI) of $7.3 billion, yet FDI gets hit over procedural paperwork from a decade ago,” Okunrinboye said via his Twitter handle.
