Nigeria’s foreign direct investments inflow has been on the decline for 4 consecutive years now.
For instance, FDI in Nigeria declined 36% from $3.5billion to $2.2billion in 2018, according to a report from United Nations Conference on Trade and Development (UNCTAD), making it the lowest foreign inflows that Africa’s largest economy has recorded in last 13 years when the Geneva-based permanent intergovernmental body started tracking FDI data across the globe.
In the third quarter (Q3) of 2019, Nigeria received $5.36billion capital importation (inflows) compared to $5.82billion in Q2. This is the lowest amount of capital importation received in the year.
Nigeria’s FDI dropped to $77.97 million in Q2 2021, indicating a 49.6% and 47.5% decline compared to $154.76 million and $148.59 million recorded in the previous quarter and Q2 2020 respectively. It only increased by $753 million in Q4 of 2022.
Ghana has overtaken the most populous, oil-rich African country as the largest recipient of FDI in the region despite Nigeria posting a gross domestic product (GDP) that was about eight times that of Ghana. In recent times, world giant tech companies like Google, Twitter have located their West African regional headquarters in Ghana despite Nigeria being the highest user of their products and services. Some multinational companies who were already in Nigeria are leaving Nigeria for other neighbouring African countries like Ghana.
The paucity of FDI in Africa’s largest economy, despite its huge endowment of natural resources, dynamic and youthful population continue to reflect the dearth of critical infrastructural facilities, and heightening insecurity, which has continued to make the environment unconducive for businesses to thrive.
Government the role of foreign direct investments in a developing economies like Nigeria, examine the causes of decline in foreign direct investments in Nigeria and what could be done to remedy the situation.
Factors Affecting Foreign Direct Investment Inflow in Nigeria
- Policy flip flops
- Corruption
- Monopoly
- Lack of infrastructure (power, transportation)
- Insecurity
- Government agencies bureaucracy
- Inflation
- Economic growth
- Foreign Reserve
- Foreign reserve
- Foreign exchange
Policy Flip Flops
Government policy inconsistencies are red flag to any form of investment. When government regulations change every now and then, it creates uncertainty in the business environment, thereby discouraging foreign investments. In Nigeria, every government regime upturns polices of previous governments and comes up with its own policies. A regime even changes polices within the lifespan of the regime. Investment is all about risk, but investors would want to invest in an economy where the future can be predicted.
Foreign Reserve
Foreign investors look at countries’ reserves before investing in such countries. Reserves show the possibility of repatriating their profits easily. As at May, 2023 Nigeria’s foreign reserve standards at $35.36 billion, which is not quite encouraging.
According to official records, over $2bn of Foreign Portfolio Investors (FPIs) funds seeking to be repatriated were locked in the economy due to the severe dollar scarcity.
Foreign Exchange
Nigeria operates multiple exchange rates. No cut out foreign exchange rate, coupled with incessant devaluation of the naira. Foreign exchange is not readily available for businesses for imports and for repatriation of profits by foreign investors.
The Central Bank of Nigeria Governor, Gowin Emefiele at the International Partnership Forum in Paris, on October 10, 2021, begged foreign investors to consider Nigeria as their investments destination, promising to make forex available for them.
“So, we will continue to do anything possible to boost the reserves to reserve the position for those of you in our foreign investor community who look at reserves, I would say the reserves today look good.
“For those of you who have businesses and are looking at the possibility of repatriating your profits through dividends, we started a programme where dividends are now being repatriated easily, as long as it is a properly documented foreign direct investment into the country.
“We are positive that you should be able to and we will give priority to you as you aim to repatriate your profits.”
World Bank in November, 2021 edition of its Nigeria Development Update tagged "Times for Business Unusual", acknowledged Central Bank of Nigeria's foreign exchange policies as of the factors hindering inflow of foreign direct investments in to Nigeria.
“The government’s exchange rate management policies continue to discourage investment and fuel inflation. Exchange rate stability is a key CBN policy objective, and to preserve its external reserves the CBN continues to manage FX demand and limit the supply of FX to the market.”
“Pressure on the naira (₦) remains intense, while the CBN has raised the nominal official exchange rate three times since the start of the pandemic (by 15% in March 2020, 5 per cent in August 2020, and 7% in May 2021), FX management remains too rigid to respond to external shocks. Meanwhile, exchange-rate management has emerged as one of the key drivers of inflation,” the World Bank said.
The present government led by President Bola Ahmed Tinubu, has mulled its intention to unify the country’s exchange rates. As good as that is, doing it at this time will collapse the already fragile economy. Nigeria should first of all achieve when fundamentals of the economy such as improved productivity, increased exportation, growth in external reserves, improved foreign exchange earnings through the non-oil sector and end to importation of petroleum products before attempting to unify exchange rates.
Economic Growth
Fluctuations on Nigeria’s economic growth affects foreign direct investments inflows in Nigeria. Foreign investors usually look at the size and growth rate of economy of any country before deciding whether or not to invest in its economy. When the economic expansion rate low or negative investors would withhold or withdraw their investments.
Accelerator theory states that “investment depends on the rate of change of economic growth.” This means that, if an economic growth rate increases from 0.5% to 1.5%
Poor State of Infrastructure (Power, Transportation)
Some of the major costs of doing business (production costs) are power and transportation. Nigeria has relatively low cost of labour but cost of energy and transportation are very high. Every business in Nigeria provides it own power to run its operation. The road networks are in bad shapes, rail transport is not working. Rail transport is the cheapest means of cargo shipment within a country. Nigeria has access to the sea but it is yet to fully utilize the that potentials. Only 2 ports in Nigeria are working optimally in terms of shipment, other seaports in the eastern region are either moribund or working bellow average of their capacities. It take weeks to months to get goods out of Nigerian ports after ship berthing.
“The nation’s mixed macroeconomic indices are as a result of the high cost of production resulting from poor power generation, absence of good road network, and other social amenities to facilitate ease of doing business, - Ambrose Omodion Chief Research Officer, Investdata Consulting Limited.
Monopoly
In an economy where healthy competition is not encouraged, will not attract foreign direct investments. In Nigerian economy some industry plays enjoy so much backup of the government and business right that prohibit any other competitors from venturing into such business or reduces their chances of survivals. For instance, Nigerian government gives waivers to some companies to import certain commodities and prohibit the rest. According to Dangote Sugar, Nigerian Government gave it the licence as sole importer of sugar in Nigeria. Presently, Dangote and BUA are in trade war over the right to import sugar into Nigeria. There should be a level playing ground that encourages healthy competition, which will attract new entrants from abroad.
Inflation
In the long-term, inflation rates can have an influence on investment. High and variable inflation tends to create more uncertainty and confusion, with uncertainties over the future cost of investment. If inflation is high and volatile, firms will be uncertain at the final cost of the investment, they may also fear high inflation could lead to economic uncertainty and future downturn. Countries with a prolonged period of low and stable inflation have often experienced higher rates of investment. Nigeria’s double digits inflation rate, which increases almost year on year, is a negative index. According National Bureau of Statistics, Nigeria’s overall inflation as at first quarter, 2023 is 22.04%.
Taxation
Multiple taxation in Nigeria in a way affects attraction of FDI into Nigeria. In recent years, Nigeria increased it Value Added Tax (VAT) from 5% to 7.5%, representing 50% increase. Customs duties and excise tariff do not favour businesses. The Nigerian Customs is more concern in generating revenue than offering effective and efficient services that will doing business in Nigeria. Multinational companies sought to invest in countries with lower operations tax rates.
Insecurity
The current state of insecurity and bombings especially in the Northern part of Nigeria has posed serious challenges to the peace and stability of Nigeria macroeconomic environment. The Nation has not only suffered colossal loss in terms of infrastructure, properties and viable human lives but also economic sabotage which leads to the displacement of foreign direct investment. Given the key role which foreign direct investment plays in most developing economies especially as a catalyst for economic growth, it was therefore necessary for Nigeria to improve the business environment by tackling insecurity headlong to make Nigeria investment haven for foreign investors
Foreign portfolio investors are looking for environmentally-secured economies with relevant infrastructure to aid business development. Nigeria is competing with every economy in the world; if we tackle the issues of insecurity and get it right, FDI will flow.