Nigeria: Experts Lament 80 Percent Drop in Foreign Direct Investments

25 July 2021

- Blame unfriendly regulatory environment, insecurity

- Recommend policy reforms to reposition Nigeria

Gboyega Akinsanmi

Experts in foreign direct investments (FDIs) yesterday lamented that FDI flows into Nigerian economy dropped from $8.41 billion in the first quarter to $1.69 in the second quarter, accounting for a 80% decrease within three months.

The experts unanimously blamed unfriendly investment climate, intractable security challenges and acute infrastructure deficit, among other institutional and structural problems as the core factors responsible for the historic nosedive in the flow of FDIs into the economy.

In separate interview with THISDAY yesterday, the immediate past Directot-General, Lagos Chambers of Commerce & Industry (LCCI), Dr. Muda Yusuf and Fiscal Policy Partner, PwC Nigeria, Mr. Taiwo Oyedele canvassed key reforms to boost investors' confidence in Nigeria's domestic economy.

The Nigerian Investment Promotion Commission (NIPC) had, in a new report, revealed that investment announcements in Nigeria fell to $1.69bn in the second quarter from $8.41bn in the first quarter, indicating a decline of about 80%.

The report had also revealed that the total value of investment interests in the first half of this year fell by $1.57 billion to $10.11 billion, compared with the value recorded in the second half of the previous year.

Concerned with these disturbing records of FDI flows, LCCI's former director-general pointed out that diverse institutional, regulatory and structural challenges had eroded investors' confidence in the Nigerian economy.

Specifically, Yusuf said: "It is investors' confidence that drives investment, whether domestic or foreign. Investors are generally very cautious and painstaking in taking decisions with respect to Foreign Direct Investment (FDI).

"This is because FDIs are often long term and invariably more risky, especially in volatile economic and business environments. Uncertainties aggravate investment risk. Investors in the real sector space are grappling with structural problems especially around infrastructure."

Yusuf, therefore, identified key areas of the troubled economy that completely eroded confidence, especially since 2015 when President Muhammadu Buhari took over the leadership of Africa's biggest economy.

He noted that there "are grave concerns about liquidity in the forex market, There are concerns about the accelerated weakening of the currency. There are issues of heightened regulatory and policy risks in many sectors.

"Investors' confidence has also been adversely affected by the worsening security situation in the country. Meanwhile, our domestic economy is still struggling to recover from the shocks of the Covid 19 pandemic. These are the likely factors affecting investment decisions," he said.

He, however, suggested that the country's ability to attract FDI would largely depend on how its political leadership could position the economy and worked out strategies to restore investors' confidence in the economy.

LCCI's former director-general, thus, canvassed the investment climate quality, which according to him, would make a huge difference if objectively mapped out and passionately implemented.

He, also, asked the federal government "to ensure an acceleration of necessary reforms to make Nigeria a much better investment destination. We need policy reforms, regulatory reforms and institutional reforms, among others.

"We should accelerate the ongoing foreign exchange reforms; we need to undertake trade policy reforms to liberalise trade in sectors of weak comparative advantage; we need regulatory reforms to make regulations more investment friendly.

"We need to create new opportunities in the public private partnership (PPP) space, especially in infrastructure. We need to see more privatisations of public enterprises. It is important as well to quickly fix the ravaging insecurity in the country. All of these are crucial to boost investors' confidence."

Oyedele, also Chairman of the COVID-19 Intervention Committee for PwC West Africa, shared Yusuf's position on factors responsible for an 80% drop in the FDIs, observing that investment "is attracted by the prospect to earn competitive risk adjusted returns."

As much as Nigeria presents a huge opportunity for descent returns in virtually every sector, he argued, the risk factors have escalated in recent times especially insecurity, foreign exchange risk and policy uncertainties.

He, therefore, said these factors made the country's risk adjusted returns unattractive and unappealing, saying while it was unfortunate, it was not surprising to see the significant decline in the flow of FDI into the country.

Even for existing businesses across sectors, Oyedele explained that the country "is experiencing low gross capital formation and decline in purchasing managers' index both pointing towards low domestic investment."

In this light, Oyedele recommended that the federal government should be deliberate in addressing the key challenges especially insecurity and policy environment to attract the much needed foreign and domestic investments.

In its new report, NIPC had claimed that the value of FDI flows "is $5.05 billion higher than that of the same period of the previous year just as the analysis of investment announcements by sectors revealed that the manufacturing sector attracted the highest investments with $5.9 billion or 58%."

It was followed by construction, $2.9bn (29%); electricity (including gas, steam and air conditioning supply), $680m (7%) information and communication, $410m (4%); while others recorded $210m (2%).

By destination, Bayelsa and Delta states attracted the most investments out of the 14 states that were listed, with $3.60bn (36%) and $2.94bn (29%), respectively.

The report also showed that domestic investors made the highest contribution of $3.29bn or 33% per cent of the total investment announcements; $1.40bn (14 per cent) emanated from Morocco; $950m (nine per cent) from China; $640m (six per cent) from UK; and other sources accounting for $3.82 billion (38%).

The NIPC said Nigeria received 29 projects across 14 states in H1 2021, compared to 34 projects across 16 states and the Federal Capital Territory in H1 2020.

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