In the past few years, Nigeria has attracted more Chinese investment and portfolio capital.
According new data, foreign direct investment (FDI) inflows in Nigeria are decreasing. There is nothing irreversible about the regression, however.
Nigeria’s growth promise remains intact. But that potential must still be delivered.
Africa attracts more FDI inflows
The regional FDI story remains promising. In 2013, FDI inflows to Africa rose by 4 percent to $57 billion. It was driven by international and regional market-seeking and infrastructure investments
Expectations for sustained growth of an emerging middle class attracted FDI in consumer-oriented industries, including food, IT, tourism, finance and retail.
Southern African countries, especially South Africa, experienced high inflows. Persistent political and social tensions continued to subdue flows to North Africa, whereas Sudan and Morocco registered solid growth of FDI.
For a decade, Nigeria has been seen as a promising mini-BRIC economy. After all, the country benefits from abundant energy resources, huge population and favorable demographics, strong growth record and institutional reforms and, until recently, macroeconomic stability.
The successful BRIC economies tend to be attract foreign direct investment. In Nigeria, the FDI story has been different and last year was no exception.
Decreasing FDI in Nigeria
FDI inflows peaked at $8.9 billion in 2011 but have been decreasing ever since, amounting to $5.6 billion in 2013.
In successful BRIC economies, FDI, as a percentage of gross fixed capital formation, tends to steadily increase. In the past decade, the Nigerian trend has been a negative one. In 2005, the percentage figure was still 48 percent, significantly higher than West African average. But it has steadily declined to 17 percent, which is significantly lower than West African average.
The relative decline of FDI in Nigeria is not a cyclical fluctuation. It reflects almost a decade of decline.
The trend is structural and historical, as evidenced by FDI stocks which reflect past, accumulated foreign investment in the country. As a percentage of GDP, FDI stocks have been nearly halved from 54 percent in 1995 to 29 percent in 2013.
Stagnation in institutional progress
There remain some institutional obstacles to increasing relative FDI. Under the 1995 Nigerian Investment Promotion Commission Act, 100 percent foreign ownership is allowed in all industries except for oil and gas. Nevertheless, Nigeria’s most important sources of FDI have been the home countries of the oil majors: the United States (Chevron Texaco, Exxon Mobil), the UK (Shell), China, and South Africa.
The government has hoped to bring in even more investment to meet its target of becoming one of the world’s top-20 economies by 2020. This objective is predicated on a sophisticated business environment, lower corruption and rising competitiveness.
In the Doing Business indicators (World Bank), Nigeria is currently ranked 147th, which suggests a significant decline in just a year.
In global competitiveness indicators (World Economic Forum), Nigeria is now ranked 120th, which also suggests a negative turn.
Furthermore, Nigeria has fallen to 144th in corruption perceptions (Transparency International).
Finally, the stagnation in business environment, competitiveness conditions and corruption perceptions has been compounded by rising perceptions of investor risk.
Risk perceptions
On the one hand, international investors are attracted by Nigeria’s huge potential. On the other hand, they wonder whether Nigeria is facing several major risks.
First, there is the political risk associated with the 2015 election, which observers fear could result in political gridlock or fragmentation. When central bank governor Lamido Sanusi was suspended by President Goodluck, many investors saw this as a sign of deterioration in financial development. Third, as the US Fed began tapering last December, emerging economies that are more fragile have been under increasing investor pressure. Fourth, increasing terrorism by Boko Haram has significantly contributed to risk perceptions among international investors.
The potential of FDI inflows can be restored in Nigeria if the concerns associated with these political, financial, investment and security risks are adequately addressed.
The nation’s growth promise remains solid and strong. But the devil is in the execution. The old “more of the same” policies are no longer enough. Over time, Nigerians cannot prosper without stability.
It is with strengthened institutions, upgraded business environment and zero-tolerance toward corruption that Nigerian companies, entrepreneurs and markets can deliver their promise.
Dan Steinbock
