The quantum of foreign direct investment (FDI) in the country has slowed 80.38 percent in a decade due to poor investment climate, prolonged security concerns, and growing infrastructure deficit, according to analysts at Financial Derivative Company (FDC).
They indicated that in recentness years, Nigeria’s FDI has been struggling, reaching a mediocre $981 million in
2017, which is a far cry from its previous peak of $5 billion in 2008.
“While the partial market-oriented change to the exchange rate regime in 2016 encouraged the minor 2017 peak, an array of other fundamental problems such as prolonged insecurity, a poor investment climate, and a significant infrastructure deficit, still make the country appear highly risky to long-term investors,” analysts at Financial Derivatives said in their latest Economic Monthly Update seen by business a.m.
They hinted that a likelihood of the US Federal Reserve resuming its monetary policy tightening cycle in the next quarter would make the already bad situation worse as it could trigger a reversal in portfolio investment (hot money) and underscores the importance of FDI, adding that low FDI inflows would continue to be a concern for policymakers.
Nigeria appears risky to long-term foreign investors, they said adding that the country’s reliance on hydrocarbons for government revenue and foreign exchange remains a fundamental weakness of the economy, which subjects it to boom and bust cycles.
“This lack of economic diversification is a major deterrent for investors and partly plays a role in the FDI inflow fluctuations tracked by the National Bureau of Statistics.
When the price of oil is high, money inflows increase and vice-versa.
“For instance, the price of oil peaked in 2014, the same year Nigeria recorded its highest FDI inflow this decade, at roughly $2.7bn. As the price of oil fell, FDI ebbed, as the 2017 figure of $981mn reflects,” they noted.
The prolonged state of insecurity in Nigeria is another major factor they adduced.
According to them, it does little to attract foreign investors. The country has been contending with spurts 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.
“Very few foreign companies are willing to jeopardize the lives of their employees and assets in such a volatile
and sometimes violent environment,” they said.
A third key fundamental factor for the poor FDI inflow is the poor investment climate characterized by overly
stringent government policies, bureaucratic bottlenecks for securing permits, and a weak legal framework.
In 2015, MTN, one of the successful foreign investors in Nigeria, was sanctioned with a $5.2 billion fine for failing
to disconnect unregistered subscribers, they referenced, adding that such draconian punishment cannot be encouraging for prospective investors.
Finally, they fingered the nation’s huge infrastructure deficit is another major investment deterrent, saying the lack of stable power means manufacturers have to rely on expensive alternative energy sources, such as diesel
In addition, many 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.
“Given all of these factors, it is not difficult to see why many potential investors opt for other markets like Morocco, Kenya, and South Africa,” they averred, adding that if the current administration is to make good on its pledge
to push up economic growth rates and foster inclusive and broad-based growth, capital must be mobilized.
They noted that while some of the funds should arise locally, especially as the local finance sector and capital markets grow, investment funds from abroad are urgently needed. Recent downward trends in FDI are therefore discouraging.
“However, not all hope is lost. The federal government has set to work to correct these anomalies. Efforts to expand the tax base, reduce red tape, and strengthen the regulatory framework for investment are being pursued, albeit with varying degrees of success. This should help enhance the lure of Nigeria’s business environment, which in turn would attract FDI,” they recommended.
They noted that wider business operating environment has improved, and indeed Nigeria jumped 24 places to 145 out of 190 countries surveyed in the 2017 World Bank Doing Business index.
Considerable progress has also been made on the drive to reduce Nigeria’s dependency on oil.