BusinessDay
NigeriaDecides2023

Fading FDI piles pressure on FG to step up hunt for private capital

Nigeria is finding out that attracting Foreign Direct Investment (FDI) into a country that has a larger population than Egypt (102 million), Ghana (31 million), Morocco (36 million) and Canada (38 million), combined won’t be a smooth ride in a new COVID 19 world where access to private capital is keenly contested.

Although Nigeria boasts of a flourishing tech scene thanks to its youthful 206 million population, the country’s perpetual lack of structural reforms means deep-pocket foreign investors are pressing pause on Nigeria’s huge potentials and abundant natural resources.

Latest data from the National Bureau of Statistics (NBS) show Nigeria’s overall capital inflows increased by 97.73 percent to $1,731.37 million as of nine months in 2021.

Portfolio investment was the largest contributor, accounting for almost 70.3% ($1,217.2 million) of total capital inflows during the period under review. While FDI inflows, a word frequently touted as the solution to Nigeria’s economic woe accounted for just 6.23 percent or about $107.81 million of the total capital imported by Nigeria in the third quarter of 2021.

The decline in FDI for the past five years can be traced to the degrading state of Nigeria’s oil fortunes as active oil explorations bring about a billion investments in the country’s economy as well as the development of related sectors of the economy and infrastructure.

“Nigeria no longer commands attention within the global oil market while its oil rigs have also lost the status as the most sought-after beautiful bride by many suitors,” Joe Nwakwue, former chair of the Society of Petroleum Engineers (SPE), told BusinessDay.

It’s now or never: How to attract more FDI

Many believe that the adverse economic impact of the COVID-19 pandemic and a growing gospel of ‘life after oil’ presents an opportunity to forge an investment-led economic growth strategy, much of which will depend on the country’s ability to mobilise both local and foreign direct investment.

When the World Bank Group surveyed hundreds of executives at multinational companies to find out what drives decisions around foreign direct investment, the results showed that investors value a business-friendly regulatory environment as well as stable macroeconomic and political conditions.

These crucial factors are missing in Nigeria, according to some experts surveyed by BusinessDay.

They point to policy inconsistency, a business environment that existing local and foreign investors say is anti-business, and the lack of political will to open up the economy to private capital.

“The most senior people in government say the right things about attracting investors, but the actions of a lot of people who work for government generally send a different message to investors,” Yewande Sadiku, the immediate-past Executive Secretary/CEO of the Nigerian Investment Promotion Commission (NIPC), an agency of the Federal Government established to foster investments in Nigeria, said in an interview with THISDAY.

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She added, “Investors do not listen to what policymakers say; they watch how policy makers behave, act and treat investors that are similar to them. These are the things that really give them the sense whether someone is serious about a policy or not”.

One investor who craved anonymity said each time he has tried to invest in Nigeria, government bureaucracy has proved a difficult hurdle to scale.

“Petrodollars still account for a good chunk of dollar inflows, non-oil exports have stalled on the back of unfavourable policies and we still haven’t gotten our act together to tap our diaspora strength, which means we haven’t tackled our dollar supply constraints,”

Resolving the thorny issues holding back FDI into the country will prove decisive in reducing the unemployment rate in Nigeria, which NBS data shows has doubled to 33.3 percent since President Muhammadu Buhari assumed office in 2015, while 90 million Nigerians are living in extreme poverty, more than any other country, according to findings based on a projection by the World Poverty Clock and compiled by the Brookings Institution.

Nigeria has made some efforts in improving the ease of the business environment. The country ranked 131 on the World Bank’s Doing Business 2020 index, moving up 15 places from its 2019 spot, and has been tagged as one of the most improved economies in the world for running a business.

However, most of those gains haven’t translated to increased investment inflows. For instance, it’s still 10 times costlier to transport cargoes from the Lagos ports than it is to move them from seaports in Ghana and South Africa, according to a research by SBM Intelligence.

The Apapa and Tincan Island ports, Nigeria’s busiest ports, have been bedevilled by traffic congestion for more than 10 years and the government’s efforts at resolving the problem have been grossly inadequate.

Data compiled by SBM Intelligence showed that local transport from the port in Lagos costs an estimated $2,055. This is compared to $285 spent in moving goods from the Tema port in Ghana and $208 from the Durban port in South Africa.

Opportunity to salvage FDI

Despite challenges, there is a growing opportunity for Nigeria to salvage its declining FDI performance and the resultant contribution to GDP through further propping up venture financing flows into its entrepreneurship ecosystem.

Nigeria’s entrepreneurship ecosystem has attracted $1.37 billion investment deals in 2021 amid the Covid-19 pandemic, according to a data compilation by thebigdeal.gumroad.com – an African startups deals database.

The data shows that Nigeria startups attracted the most investment deals for the period in the continent, followed by South Africa’s $838 million deals with Egypt and Kenya coming third and fourth with $588million and 375million deals respectively.

Experts in the country’s start-up ecosystem say the record-breaking investment deals attracted by start-ups in Africa’s most populous country are an indication that entrepreneurship is gaining lots of momentum.

Tech and fin-tech start-ups in Africa’s biggest economy have continued to attract massive funding from investors including angel, seed, as well as, early-stage and later-stage venture capitalists across the globe.

This has made investments in the ecosystem grow steadily over the past years, pointing to a relative improvement in the landscape, experts say.

“Start-ups in Nigeria have created thousands of jobs and activities within the ecosystem and this is striving to consolidate the nation’s status as a top-notch international hub by attracting investors and stimulating entrepreneurship in the country,” Oo Nwoye, executive director, Tech Circle says.

Nwoye says that Nigeria is transitioning into a dynamic ecosystem offering start-ups a platform to potentially grow into million-dollar businesses.

Three Nigerian start-ups hit the $1 billion valuation mark last year, making them become unicorns. They are Flutterwave, Opay, and Andela all playing in the fintech industry.

Why FDI is crucial

Nigeria’s low Foreign Direct Investment (FDI) is partly responsible for the country’s acute shortage of jobs, tepid economic growth and government’s undiversified revenues.

FDI is recognised as a powerful engine for economic growth. It enables capital-poor countries to build up physical capital, create employment opportunities, develop productive capacity, enhance skills of local labour through transfer of technology and managerial know-how, and help integrate the domestic economy with the global economy.

No country seeking to emerge as an economic powerhouse can do so without attracting FDI. It’s no surprise that the United States, the world’s largest economy, is the largest recipient of global FDI. The US attracted some $4.63 trillion in FDI in 2020.

The higher FDI a country attracts, the better the standard of living of its people as they can easily secure jobs and invest in themselves from education to health.

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