Nigeria is at a critical juncture in its economic history. Against the backdrop of an era-defining general election in 2023, the Bola Tinubu administration has prioritised attracting foreign direct investment (FDI) as a key metric to ensure economic growth and stability. In the last decade, Nigeria has faced considerable economic rollercoasters with a period of high growth evidenced by a 6.4% annual GDP growth in 2014 (then one of the fastest growing economies globally), to a halt in good fortune with two de-growth years evidenced by crunching recessions in 2016 and 2020.
The current state of the Nigerian economy could be described as a “scattergun” approach. Food inflation is at about 40%, the headline inflation rate is over 30%, and in the last Monetary Policy Meeting (MPR) of the Central Bank of Nigeria (CBN), the monetary policy rate was hiked to over 27% in an attempt to stabilise market prices and halt rising inflation.
While there have been attempts to make investments attractive for foreign investors and for trade by floating the naira, it still makes investing in Nigeria a hard sell. The global rating house Fitch Ratings has rated Nigeria’s sovereign bonds as a “B—,” categorising them as high risk, but they could lead to high returns for investors with a large risk appetite.
The International Monetary Fund (IMF) has ranked Nigeria as the 4th largest economy in Africa for 2024, behind South Africa, Egypt and Morocco. In Sub-Saharan Africa, the fastest growing economies for 2023 were listed to be Niger (11% annual GDP growth), Senegal (8.8 annual GDP growth), Rwanda (7.0 annual GDP growth), Cote d’ Ivoire (6.6% annual GDP growth), and Burkina Faso (6.4% annual GDP growth) amongst others including the Benin Republic, Gambia, Ethiopia and Burundi. Interestingly, this is against the global average of 2.9% for the year 2023 according to the IMF.
There have been some attempts at fiscal responsibility by the Bola Tinubu Administration with the overarching view of economic diversification and growing non-oil sectors, aimed at reducing Nigeria’s dependence on oil exports and resistance to external shocks in global prices for crude oil. However, it seems that investors require more to be able to breed confidence in investing in a seemingly unpredictable market. An evaluation of the barriers to Nigeria attracting foreign direct investment is imperative.
Barriers to Fruitful Long-Term Foreign Direct Investments
a. Policy Inconsistency:
Modern functioning democracies globally understand one major concept in governance; that government is a continuum. The policy inconsistencies by different administrations make it difficult to gain investor confidence. Potential investors are at times hard-pressed when looking for an overarching principle or philosophy guiding an administration’s policy in different sectors, including taxation. At times, legal advice for investors borders on what the law is silent on and not what the law outrightly permits or prohibits. An example of this has been the policy inconsistency regarding the regulation of cryptocurrency exchanges in Nigeria. The multiple CBN regulations spanning the ban and subsequent direction to the closing of accounts dealing in cryptocurrency but in recent times government agencies have expressed a desire to understand these transactions and subsequently levy adequate taxes.
b. Dispute Resolution:
Nigeria is a signatory to the Washington (ICSID) Convention and therefore when a dispute arises between a foreign investor who is also a national of a Washington Convention signatory, such disputes are usually referred to the International Court for the Settlement of Investment Disputes (ICSID). However, while Nigeria’s membership of ICSID gives certainty to investors that disputes arising out of their investments will be resolved through international best practices and on time, the same cannot be said of the national court system. Delays are the bane of any business transaction and the rules of court have made little provisions to protect the sanctity of timeous business transactions through the speedy resolution of commercial disputes. While the enactment of the Arbitration and Mediation Act 2022 is a welcome development, it must be noted that, unlike other modes of alternative dispute resolution (ADR), Arbitration which is best suited for high-level commercial transactions can be quite expensive and bring with it another dilemma which is the enforcement of the arbitral award without any post-enforcement hassle from the other party to the transaction.
c. Insecurity:
Insecurity is still a major challenge affecting investments. The issue has streamlined foreign direct investments in the country to a select few major cities that are largely perceived as safer. Furthermore, as not all foreign investors have similar risk appetite, capital and manpower, it restricts small-scale investors with the potential to invest in rural areas where there is lesser government presence and security personnel.
Recommendations for Novel Foreign Investors in the Nigerian Economy:
a. Investment in underserved sectors of the Nigerian Economy: Due to the global push for more renewable sources of energy and the effect of climate change, investments in Nigeria’s mainstay investment attraction, oil and gas are considered less attractive than in preceding years. However, there is a concerted effort by the Bola Tinubu administration to intensify economic diversification and increase non-oil exports. A good strategy for potential investors would be to glean underserved sectors of the Nigerian economy and work towards achieving pioneer status which presents several benefits including tax breaks for up to five years.
b. Investment in Nigeria’s Sovereign Bonds: Nigeria’s bond issuance is targeted at generating revenue for critical investments in infrastructure, and other sectors of the Nigerian economy in need of government funding. While Nigeria’s Sovereign Bonds have been given an average score by the Fitch Ratings, it must be said that for novel investors with a higher risk appetite, looking for high returns on investment, Nigerian bonds are the perfect place to invest. Stable investment in more stable economies yields more modest, but consistent returns, however in the short-medium term Nigerian bonds have the potential to run a high return on investment, especially with its booming population needing infrastructure and social amenities. This method albeit risky still provides some level of protection for foreign investors as their capital is guaranteed by the Nigerian government and a default on the return of capital will lead to further plummeting in international bond ratings including the S&P Index.
c. Investments in food distribution and agriculture sector: Nigeria’s current inflation rate has severely limited the disposable income of the middle class. Restaurants in major cities are usually near-empty and the soaring food prices arising from food insecurity have had a crippling effect on distributors. With an unprecedented population of well over 200 million people, feeding the nation has never been more important than it is today. Novel investors in the Nigerian economy must consider investment in mechanised agriculture and potentially consider a diversified transport system for the delivery and distribution of farm produce. The major barrier to agriculture is that in Nigeria most of it is small-scale subsistent agriculture employing manual farming tools in the rural areas unlike in other Western nations E.g. Italy. Security considerations must also be factored in before the purchasing of land for farming purposes as key select sub-urban and rural areas should be considered.
The Road Ahead: Harnessing Potential and Attracting Investors
Novel Investors should make rigorous efforts to understand the terrain intended for investment. The Nigerian economy is going through a flux which on paper may look daunting, however, this might produce unique opportunities for first-time inventors. Different sectors in Nigeria have their unique appeal and professional advice both from legal, and finance investment professionals is necessary. While the attempts at economic diversification are commendable by the Nigerian government, this must be coupled with strict fiscal responsibility. While the recent acceptance of Nigeria as a BRICS partner country holds potential for further investment in the private sector, attracting foreign direct investment should be channelled towards providing an enabling environment for the ease of doing business. The nation’s innate potential must be put to work and commendable results will have foreign investors reaching deep into their pockets.
Written by: Daberechukwu Ogbuishi
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