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From $24bn to $5bn, Nigeria faces investment drought

From $24bn to $5bn, Nigeria faces investment drought

The total foreign investment that flowed into Nigeria in 2019 is more than four times what the country attracted last year, as the country’s failure to solve many of its economic problems including dollar shortage has scared away more investors.

The value of capital imported into Africa’s biggest economy plunged to a six-year low of $5.33 billion last year from $23.99 billion in 2019, according to the National Bureau of Statistics (NBS).

Foreign investment into the country had risen steadily for three years after it sank to a record low of $5.12 billion in 2016, when the country fell into its first recession under President Muhammadu Buhari, from $21.32 billion in 2013.

It started declining again in 2020, when the country experienced what the World Bank described as its deepest recession in four decades due to COVID-19-related disruptions.

Although the country emerged from the recession in the last quarter of that year, the foreign investment it attracted in 2021 fell to $6.70 billion from $9.68 billion in the previous year.

“The importance of capital inflows in a country where foreign exchange is in high demand to stimulate economic activity is very clear,” KPMG Nigeria said in a note on April 6.

It said the continued decline in foreign capital inflows in the presence of dwindling crude oil sales and generally poor and unstable export earnings has slowed down foreign reserves accretion and widened the forex supply gap, thereby putting pressure on the exchange rate.

The professional services firm said inadequate access to forex has constrained inputs for production, leading to higher production costs, lower revenues and slower economic growth.

The country’s forex reserves stood at $35.39 billion as of April 5, down from $37.08 billion at the end of last year, data from the Central Bank of Nigeria show.

KPMG said investor confidence, especially portfolio investors, has weakened amid “what foreign investors consider an ambiguous forex regime characterised by multiple exchange rates, inadequate access to forex, and high forex volatility.”

“Investors may also be finding it difficult to make certain investment decisions in a year of political transition, which has remained tense, and typically will adopt a wait-and-see approach to investing into the country until new administrations have settled in and they can understand the direction and priorities of the new government,” it said.

The firm said the country would struggle to attract increasing foreign capital for most of 2023.

Foreign direct investment (FDI) into the country tumbled to $468 million last year, the lowest level in at least nine years, according to available NBS data.

“FDI inflows over the course of the administration of the outgoing President Muhammadu Buhari declined steadily, adding another poor mark to an already-weak economic scorecard,” Virág Fórizs, Africa economist at London-based Capital Economics, said.

“Unorthodox ‘Buharinomics’ policies – including protectionism, an artificially strong and stable currency as well as capital controls – likely contributed to investors shunning Nigeria.”

She said in a note that reversing the decline in FDI inflows would be one of many challenges facing the incoming government of Bola Tinubu.

“And returning to investors’ good books will not be easy as concerns about the multiple exchange rate regime and repatriation of funds run high. Egypt’s example is perhaps telling. Even after a significant currency devaluation, investors have continued to question policymakers’ commitment to the move to a flexible exchange rate,” Fórizs said.

She said that with no meaningful improvement in Nigeria’s business environment, the country would likely struggle to attract much-needed foreign investment.

“And missing out on productivity gains from foreign investment provides another reason to expect the economy to remain on a low-growth path over the coming years.”

Analysts at CSL Stockbrokers Limited said scarcity of forex amidst unclear FX policies, the lingering effects of two recessions, interest rate normalisation in developed economies, inflationary pressures, security concerns, and structural challenges have continued to hamper the inflow of foreign investments into the country.

They said tensions around the 2023 general elections also had a negative impact on capital inflows in 2022.

“Looking ahead, we note that more needs to be done in addressing pertinent issues facing the economy to brighten the country’s chances of attracting capital inflows. The country’s foreign exchange policy is one of those key issues,” they added.