• Friday, March 29, 2024
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BusinessDay

For Nigeria, Investment-led growth is the only option

Nigeria economy

As the nation grapples with the economic fallout from the crash in oil prices and coming global recession due to the coronavirus pandemic, one major message from economists, business leaders and analysts polled by Businessday, to the President and his economic team, is that the days of easy oil money are over.

They add that adopting an economic plan that has at its core an investment-led growth strategy, is the only way Africa’s largest economy will recover and stay on its feet amid plunging crude oil revenues and the Covid-19 pandemic that has put the world economy on the edge.

Such a plan if enacted, would be arriving at a time of great uncertainty for Nigeria and as President Muhammadu Buhari is set to appoint a new Chief of Staff to replace his longtime trusted confidant Abba Kyari who tragically died from the Coronavirus.

Exposed for its lack of economic diversification and faced with the prospect of its worst economic crisis in 40 years, Nigeria may now have all the excuse it needs to jettison its largely unsuccessful statist approach to the economy and adopt an investment-led strategy that relies on privatisation and attracting Foreign Direct Investment (FDI).

With oil receipts under threat from the coronavirus-induced slump in demand which has left millions of Nigeria’s bonny light crude unsold and prices as low as $12, the government’s already stretched resources will be further exposed.

That will not only threaten the financial stability of the 36 states heavily reliant on federal allocations to pay their bills but also significantly hamper the implementation of the federal budget, putting an already battered economy in worse shape.

Read also: Nigeria’s cocoa midcrop export to shrink as coronavirus hits global demand 

That’s particularly disturbing for Nigeria which has largely shuned private capital in the last five years while favouring debt capital. The problem is the room for debt has narrowed given how much Nigeria already commits to debt servicing.

In the face of thin options, adopting an investment-led strategy to economic growth may be the only way the economy stays on its feet, according to economists and political analysts.

“There aren’t many options at this time for the government, it’s not feasible to borrow so much neither can government revenues trigger an economic resurgence,” one senior investment banker told Business day.

“However, it will take much more from the government at this time to convince private investors that the country is open for business and needs their capital,” the person said.

“The priority should be how do we get foreign direct investment on a large scale to help the economy through the hard times post-Covid.”

There aren’t enough opportunities for Foreign Direct Investors (FDI) looking to park their cash in Nigeria.

That’s because Abuja has maintained its 100 percent ownership of key infrastructure, including rail transport, pipelines, power transmission, stadiums, public universities and tertiary hospitals across the country, effectively limiting options for private investment in the country.

Even the oil and gas sector, which has typically attracted the larger chunk of new FDIs to the country, has come unstuck, as a set of fiscal reforms (contained in the Petroleum Industry Bill, meant to unlock new investments) has stalled for decades.

The lack of investment-friendly reforms has been telling. FDI flows fell to $2.2 billion in 2018, the lowest in 13 years, according to United Nations Conference on Trade and Development (UNCTAD).

Many of Nigeria’s peers recognize the benefits of financial globalization and have implemented reforms to attract record inflows of FDI, by liberalizing infrastructure, and privatizing a growing share of government ownership in infrastructure assets.

With its Liberalization, Privatization and Globalization (LPG) policies since 1992, India is a worthy example of this.

Saudi Arabia, with its National Transformation Plan (NTP) announced in 2016 and the 16-sector privatization programme announced in 2017, is fast becoming another example of an oil economy serious of diversifying.

By not taking the steps needed to unleash massive inflows of FDI, Abuja has been needlessly exposed to liquidity shortages which has now come back to haunt it.

“The government needs to open new spaces for foreign investors to unlock Greenfield FDI,” one economist said.

“This needs to be done now more than ever.”

Up to the early nineties, Nigeria had a larger stock of Foreign Direct Investment (FDI) than India, South Africa or the United Arab Emirates.

Enter 2018 and Abuja has been left behind, with India now having more than triple, and Saudi Arabia having more than double, Nigeria’s FDI stock.

The need to privatise redundant state assets and adopt the model of the efficiently-run Nigerian Liquefied Natural Gas (NLNG), where the government owns 51 percent and the private sector holds 49 percent, is hardly a new counsel to the government, but it has largely fallen on deaf ears since 2015.

An over bloated public sector desperate to exert itself on business is a main reason why reforms have stalled, according to Wale Okunrinboye, head of research at Lagos-based Pension Fund Managers, Sigma Pensions.

“The public sector is small but looms large,” Okunrinboye said.

“There is massive private capital waiting on Nigeria to get its head right in terms of implementing reforms before they start pouring in, but there has been a lack of urgency in pushing those reforms,” Okunrinboye told Business Day.

Up to the early 1990s, Official Development Assistance (ODA) or Foreign Aid was by far the largest inflow to developing economies like Nigeria, being twice as large as any other inflow.

Until then, developing countries either relied on export revenue or foreign aid.

However, from the mid-1990s, FDI, Remittances and Foreign Portfolio Investment (FPI) caught up with and overtook ODA one after the other, as the countries embraced Financial Globalization.

FDI overtook ODA by 1994 and remained the largest type of inflow until 2016. Remittances overtook ODA in 1996 and remained the second largest and the most stable type of inflow into developing countries until 2016 when it caught up with FDI and is now projected to become the largest inflow into developing countries from 2017 onwards.

FPI has proved the most volatile of all inflows often surging past ODA at different points since 1996 but perennially falling below it before surging past it again; backing an earlier claim that FPI is volatile and insufficient in building a sustainable economy.