“Nigeria may not be a good market for you to waste multi-million dollars investment in; a vast number of its citizens are poor and would not be able to afford luxury items.” These were the remarks from a foreign independent research team, sent to assess the viability of the Nigerian market for a telco after the telecommunication industry was deregulated in 2001.
That appraisal about the Nigerian market discouraged a lot of potential investors who were hitherto keen on tapping from the huge potentials in which the market could have offered as they were scared their investments may not pay off.
It was not until May 16 of that year that Econet now Airtel and South-African based telecommunication firm, MTN, shrugged off that narration to become the first GSM networks provider to make calls following the globally lauded Nigerian GSM auction conducted by the Nigerian Communications Commission earlier in the year.
Fast-forward today, that decision by the telecommunication firms is paying-off in thousand folds.
There are two major ways in which a country attracts investments. One is through foreign direct investment (FDI), popularly known as “sticky money”, while the other is the foreign portfolio investment, popularly known as “hot money”.
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FPIs are investment types that attract foreigners through the purchase of stocks or bonds issued in Nigeria. The performance of this kind of investment largely depends on how profitable those assets are and the stability of the economic environment.
For direct investment, an investor would have to set up structures in the host countries. The distinction between these categories of investment is that FDI involves long term commitment while FPI (also known as hot money) is short-term – investors could leave in a snap.
While both investment types are important for any country, a country looking to the path of economic development, to create jobs and improve on its basic infrastructures, would seek more direct investments to its advantage.
Over the years, the successful operation of companies into Africa’s biggest economy has been a mixed experience. For some, they have been able to stand the test of time while for many others it has been tough, sometimes to the point of closing shop.
Nigeria is one of the few countries that have consistently benefited from FDI inflow to Africa, thanks to its huge untapped market and its growing youthful population. Nigeria’s share of FDI inflow to Africa averaged around 10 percent, from 24.19 percent in 1990 to a low level of 5.88 percent in 2001 up to 11.65 percent in 2002, data from the United Nations Conference on Trade and Development (UNCTAD) showed. During that period Nigeria was the second top FDI recipient in the continent just behind Angola in 2001 and 2002.
FDI forms a small percentage of the nation’s gross domestic product (GDP), however, making up 2.47 percent in 1970, -0.81 percent in 1980, 6.24 percent in 1989 (the highest) and 3.93 percent in 2002. On the whole, it formed about 2.1 percent of the GDP.
Prior to the early 1970s, foreign investment played a major role in the Nigerian economy. Until 1972, much of the non-agricultural sector was controlled by large foreign owned trading companies that had a monopoly on the distribution of imported goods. Between 1963 and 1972 an average of 65 percent of total capital was in foreign hands.
Because successive Nigeria governments have viewed FDI as a vehicle for political and economic domination, the thrust of government’s policy through the Nigeria Enterprise Promotion Decree (NEPD) (indigenization policy) was to regulate rather than promote FDI.
The NEPD was promulgated in 1972 to limit foreign equity participation in manufacturing and commercial sectors to a maximum of 60 percent. In 1977 a second indigenization decree was promulgated to further limit foreign equity participation in Nigeria business to 40 percent.
Hence, between 1972 and 1995 official policy toward FDI was restrictive. The regulatory environment discouraged foreign participation resulting in an average flow of only 0.79 percent of GDP from 1973 to 1988.
The adoption of the structural adjustment programme in 1986 initiated the process of termination of the hostile policies towards FDI. A new industrial policy was introduced in 1989 with the debt to equity conversion scheme as a component of portfolio investment.
The Industrial Development Coordinating Committee (IDCC) was established in 1988 as a one-step agency for facilitating and attracting foreign investment flow. This was followed in 1995 by the repeal of the Nigeria Enterprises Promotion Decree and its replacement with the Nigerian Investment Promotion Commission Decree 16 of 1995.
The NIPC absorbed and replaced the IDCC and provided for a foreign investor to set up a business in Nigerian with 100 percent ownership. Upon provision of relevant documents, NIPC will approve the application within 14 days (as opposed to four weeks under IDCC) or advise the applicant otherwise. Furthermore, in consonance with the NIPC decree, the Foreign Exchange (Monitoring and Miscellaneous Provision) Decree 17 of 1995 was promulgated to enable foreigners to invest in enterprise in Nigeria or in money market instruments with foreign capital that is legally brought into the country.
The decree permits free regulation of dividends accruing from such investment or of capital in event of sale or liquidation. An export processing zone (EPZ) scheme adopted in 1999 allows interested persons to set up industries and businesses within demarcated zones, particularly with the objective of exporting the goods and services manufactured or produced within the zone.
If the report from the privatization programme is anything to go by, however, the transport and communication sector seem to have succeeded in attracting the interest of foreign investors, especially the telecommunication sector.
The coming in of Airtel, MTN and others into the telecommunication space greatly shaped Nigeria’s investment landscape and paved the way for numerous inflows into the country.
In 2001, MTN spent $285 million in acquiring a GSM license that ushered it into Nigeria. Soon after, the entry of Etisalat (2008) and the acquisition of Zain by Bharti Airtel (2012) brought in more foreign capital that has led to the impressive growth of the Nigerian telecommunication sector.
It also aroused the interest of local players into the telecommunications space. An example is Globacom, owned by Nigerian billionaire Mike Adenuga.
The sheer capital that flowed into the telecommunications space led in the sector’s contribution to overall GDP to 11 percent from an average 4 percent a decade before.
More resonating examples of FDIs can be found in the oil and gas sector. Nigeria has the big four international oil companies from Shell and Mobil to Chevron and Total.
In recent times, however, foreign direct investment into Africa’s most populous nation has dwindled.
From a high of over $2.5 billion on average between 2010 to 2014, FDI inflows fell to as low as $981.75 million in 2017.
The reason for this huge decline was as a result of a global collapse in oil prices that occurred in 2014, and an agitation in the Niger Delta region, that led to the bursting of crude oil pipelines.
At that time, the price of oil, which is the biggest source of Nigeria’s revenue, fell to as low as $28 per barrel while oil production also saw a drastic fall to about $1.2 million barrel per day.
The culminating effect of falling crude oil prices and production caused the economy of Nigeria to record its first recession in more than 27 years.
As petrodollars began to dry, Nigeria’s foreign reserve was depleted faster to the range of $30 billion from the high of $50 billion seen some two years before. It then became difficult for Nigeria to keep up with its import bills.
The inability to keep up with the country’s import bills forced the Central Bank, led by Godwin Emefiele, to resort to dollar rationing.
At the time, the country restricted 41 items from accessing its official window where the naira traded at a stronger rate relative to the dollar.
What that meant was that importers who still chose to import these products were forced to source dollars from the parallel market at a weaker rate.
The increased demand for dollars in the parallel market caused the spread to widen further.
The Central Bank was left with no choice but to devalue the naira in its official window after it had weakened to about N500/$.
Being an import-dependent nation, currency devaluation hurt the economy. Rising inflation led to a loss in the real value of assets for investors.
Inflation climbed to 18 percent in 2017, the highest in six years, while investors were stuck in the country due to the inability to access dollars to repatriate their profit.
To show the extent of the pain faced by investors at the time, data from the Manufacturers Association of Nigeria (MAN) noted that no fewer than 54 companies closed operations at the time.
Among these companies affected by Nigeria’s liquidity crisis at that time was Mr Price, Woolworth, Grif, Federated Steel, and Universal Steel.
It was not until April 2017 when the CBN created the Investors & Exporters (I&E) window, where foreign exchanges are traded at exchange rates based on prevailing market circumstances, that investors began to reinforce gradually.
Though with weak economic growth, the Nigerian economy was able to limp out of recession, expanding by 0.55 percent in the second quarter of 2017.
FDIs running into troubled waters
Several foreign companies have come under the hammer of one or more of Nigeria’s regulators.
In October 2015, MTN Nigeria was slammed with a $5.2 billion (N1.04 trillion) fine by the Nigerian Communications Commission (NCC) for failing to meet a deadline to disconnect 5.2 million improperly-registered Subscriber Identification Modules (SIM) lines. According to the NCC, these lines had economic activities on them without proper registration.
The fine was however reduced to $1.7 billion after a series of negotiations with the Nigerian government.
Part of the negotiation to reduce the amount was the agreement for MTN to list on the Nigerian stock exchange (NSE).
Without fully healing from the 2015 saga, MTN Nigeria in 2018 entered yet another trouble. Nigeria’s central bank ordered it to refund $8.13 billion (6.96 billion euros) it illegally repatriated between 2007 and 2015. MTN denied any form of wrongdoings and dragged the CBN to court.
In the same period, Nigeria’s Attorney general of federation requested International Oil Companies (IOCs) to pay claims of $2 billion backlog of taxes.
These events sent negative signals to foreign investors as they withheld investment due to the perceived risk and uncertainty surrounding the Nigerian business environment.
Swiss multinational investment bank and financial services company, USB as well as British multinational investment bank, HSBC were among two notable companies that pulled out from the Nigerian market partly due to what foreigners perceived as a harsh investment climate.
Within six years the proportion of FDIs to total investment flows dropped from 20 percent in 2016 to 4 percent in 2019. The actual value has stayed just below $1 billion since 2016.
By default, this means FPIs have been rising. In 2016, portfolio investments were 35 percent of total investment, by the end of 2019, data from the National Bureau of Statistics showed FPIs had hit 68 percent. A sporadic increase from $1.8 billion to $16.4 billion.
Foreign portfolio investors to the rescue
To keep dollars coming in, the country shifted attention more to the portfolio investors.
Nigeria became one of the most attractive markets in the world because of its attractive yields and carry trade.
Between July and October 2019, the US Federal Reserve cut its benchmark rates three times to bolster its economic activities. This led to a lower yield level of about 1.8 percent-2.0 percent. Compared to Nigeria, the average fixed-income yield for Treasury bonds between the periods of the US rate cut was around 14 percent.
Consequently, FPIs became a significant channel for acquiring foreign exchange in Nigeria. And the CBN continued to fuel this position.
The apex bank even restricted local investors from participating in the OMO market – a high-interest bond that attracted foreigners. It desired to use these OMO bills to attract foreign investors while pushing local investors to spend their money on other sectors like agriculture.
But at the time, no one knew Saudi Arabia would start an oil price war and that a virus will bring the entire world to a standstill; consequently crippling a major source of revenue, and hampering Nigeria’s abilities to pay obligations.
The coinciding events created uncertainty and resulted in selloffs by foreign investors, as evidenced by the selloff on the stock exchange and the current lack of liquidity in the debt market.
Shoprite Group of Companies, in August, said it will discontinue its operations in Nigeria, citing tough economic conditions and the dollar illiquidity as major reasons.
The country is back to the same situation it found itself five years ago. Nigeria is faced with an acute dollar shortage that made the government expand the list of items unable to access dollars.
Conclusion
Recent developments in the globalization space have shown that attracting private capital has gone beyond the self-acclaimed rhetoric’s of being the “giant of Africa” or “most populous” nation in the continent.
In 2018, Ghana with a population size similar to Lagos, overtook Nigeria in attracting FDI, based on UNCTAD data. In that year, Nigeria attracted $2.2 billion in FDI, while Ghana recorded an inflow of $3.3 billion, placing it top in West Africa.
For Africa’s largest economy to return to its glory days as being the top spot for investment destination, there need to be some clarity in its policies.
Reforms around exchange rate unification, naira stability and solving dollar crisis would help in restoring investors’ confidence in the country.
Also, bridging the country’s infrastructural gap in power, health, and education as well as fixing the country’s dilapidated road network would help as well.
