Initiating Catalysts for Foreign Direct Investment

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The sustained decline in the flow of Foreign Direct Investments (FDIs) and the attendant jeopardy to Nigeria’s foreign exchange earnings has underscored the urgent need to relaunch catalysts for foreign direct investment such as foreign exchange clarity, improved security profile, stable government and business policies, among others, reports Festus Akanbi

In less than a year from now, the incumbent administration will be handing the reins of government to a new one after the February 2023 general election. 

Like a going concern, one of the features of the transition is the handover of what can be termed as gains made so far, and losses incurred by the President Muhammadu Buhari administration to its successors come June next year.

Normally various policies successfully put in place including completed and ongoing projects; the reforms in the oil industry, the infrastructure projects, especially the rail networks, among others, will form the fulcrum of several achievements to be flaunted at the point of change of baton next year. 

At the same time, a harvest of economic challenges which include the unresolved security threats to lives and property, the energy crisis, which has been linked to the near extinction of the small and medium scale industry, as well as the dip in the flow of foreign direct investments will continue to haunt the outgoing administration. 

Shortfall in FDIs

The reality is, that the unfortunate reduction in foreign investors’ appetite for the Nigerian economy which has triggered a sustained shrinkage of the nation’s foreign reserves, and the near collapse of the naira value will form the bulk of the liabilities to be handed over to the next administration.

On the issue of the persistent fall in the flow of foreign direct investment to Nigeria, analysts contended that the Nigerian economy has not been able to halt the trend because the Nigerian market still lacks the long-awaited catalysts, such as foreign exchange clarity, improved security profile, stable government, and business policies, which typically attract foreign investments, arguing further that a pre-election year, with its many uncertainties, is not the time to expect an influx of foreign investments.

Finance analysts assert that an increase in foreign investment is an integral part of an open and effective international economic system that promotes the transfer of technology, creates and improves the purchasing power of Nigerians through job creation by foreigners, and consequently contributes to an overall boost in targeted industries and the economy as a whole.

 However, the decline in foreign investment in Nigeria has been attributed to the spate of insecurity in the country, and naira volatility, characterised by a wobbly foreign exchange market. In the same vein, analysts said the recent political climate relating to the forthcoming presidential election has made many foreign investors withdraw investments in the short run due to political uncertainty.

Sustained Decline

According to a report by Nairametrics, an online news medium, Nigeria attracted a sum of $223.3 million as foreign direct investments (FDI) in the first five months of 2022, that is between January and May of the year, representing a 3.7% increase compared to $215.3 million recorded in the corresponding period of the previous year.

However, there is little to cheer about this marginal improvement because, in contrast to the comparable period of 2020, FDI declined by 7.5% compared to $241.5 million received in the reference period. This is according to data compiled from the Central Bank of Nigeria (CBN).

The report disclosed that Nigeria’s foreign direct investment has dwindled significantly recently, hitting a record low of $698.8 million in 2021, most of which was equity. However, most developing economies desire more direct investment considering the benefits it has on the host countries.

Nigeria attracted a total of $1.57 billion in capital inflows in the first quarter of 2022, falling by 28.1% compared to the $2.19 billion recorded in the previous quarter. This is according to the recently published capital importation report, released by the National Bureau of Statistics (NBS), and compared to the corresponding period of 2021, Nigeria’s capital importation declined by 17.46% from $1.91 billion received in Q1 2021.

 According to reports, the largest amount of capital importation by type was received through Portfolio Investment, which accounted for 60.87% ($957.58 million). This was followed by other investments with 29.28% ($460.59 million) and Foreign Direct Investment (FDI) accounted for 9.85% ($154.97 million) of total capital imported in Q1 2022.

 Meanwhile, foreign portfolio investment (FPI) increased by 48.95% to $957.58 million from $642.87 million recorded in the previous quarter. On the other hand, foreign direct investment (FDI) reduced by 56.74% from $358.23 million recorded in Q4, 2021 to $154.97 million in the review period.

And looking at the trajectory within three years, it is evident that the decline has been persistent. This is because capital importation into Nigeria fell by 81.46 per cent ($6.91bn) from $8.49bn in the first quarter of 2019 to $1.57bn in the corresponding quarter of 2022, according to data from the National Bureau of Statistics. 

Based on the NBS’s ‘Nigerian Capital Importation’ reports for the first quarters of 2019, 2020, 2021, and 2022, there has been a steady decline in capital inflows in the nation. 

The data showed that total capital inflow fell by 31.01 per cent from $8.49bn in Q1, 2019 to $5.85bn in Q1, 2020; it fell by 67.45 per cent to $1.91bn in Q1 2021, and further declined by 17.46 per cent to $1.57bn in Q1 2022. 

Data shows that in Q1 2021 and Q1 2022, portfolio investments were responsible for most of the capital inflows into the nation, while banking raked in the highest and the UK provided the most.

 Need for Investment-Friendly Environment

Preparing the minds of Nigerians for the erosion of capital inflows into the country, Governor of the Central Bank of Nigeria, Godwin Emefiele, in a recent Monetary Policy Committee meeting in Abuja, admitted that the unconducive domestic investment climate was impacting capital inflows into Nigeria.

 He said “The net FDI has been very low while there was a substantial reversal of FPI flows from the country in the fourth quarter of 2021. 

“This poor trend is apparently due to the unconducive domestic investment climate which appears to be worsening. In February 2022, such inflows stood at $17.6bn compared with $66.4bn in February 2021, the highest since December 2020.”

The Fears

Some financial analysts had raised the fear last year that as global interest rates increase, the temptation to invest overseas would be affected. This was corroborated by a recent publication of the World Bank ‘Nigeria Development Update (June 2022),: The Continuing Urgency of Business Unusual’ report, that rising global interest rates are going to lead to more net portfolio outflows in 2022, leading to a decline in overall capital importation.

 It said, “With rising global interest rates, Nigeria will likely experience net portfolio outflows in 2022. FPI inflows grew significantly in 2021, exceeding $6bn (1.4 per cent of GDP).

 Explaining the unfortunate trend, the Managing Director/Chief Executive, Cowry Asset Management Limited, Mr. Johnson Chukwu, confirmed that the flow of foreign direct investment into Nigeria has already reduced principally because when interest rates go up in advanced economies, investors who were arbitraging (that is, borrowing at a lower cost to invest in emerging markets at a higher yield) won’t be able to do that arbitrary opportunity vanishes.

 “For instance, if the interest rate is two per cent in America, you can borrow at that rate and come into an emerging economy and invest at a higher percentage. Even when depreciation of the local currency is factored in, there would still be yield.

“Once rates start going up, the arbitrage opportunity is almost eliminated because equilibrium would almost be attained. Because the yield that they will get investing at home will almost be the same as the one in emerging economies, they won’t have the motivation to invest abroad.

 “A lot of portfolio investors have already left. We won’t see so much in outflows again, but we would witness a reduction in inflows since the window for arbitrage gain has closed,” explained Chukwu.

Analysts warned that the situation may worsen before the year-end as political campaigns take the centre stage. They pointed out that the last week’s increase in the interest rate by the Central Bank of Nigeria may not help matters. There is also the fear that various political office holders may abandon their posts to push for their candidates in the forthcoming elections, warning that such dereliction of duties can complicate things as more investors may decide to relocate elsewhere pending the coming of a new administration.

Another issue is the tendency of the incoming administration to tinker with some of the existing policies in case a different political party produces the next president.

It is therefore very important for President Muhammadu Buhari’s government to ensure it stabilises the polity and ensures policy consistency till the last day of the administration in order not to worsen the state of the economy in general and the foreign exchange position of the country in particular.