Growing concerns as insecurity, infrastructure deficit stall FDI inflow
The monumental growth of 446 per cent in Foreign Direct Investment (FDI) recorded in South Africa in 2018, and the single-digit growth of seven per cent by Egypt is a reflection of investors’ confidence in both economies given their level of industrialisation coupled with their favourable operating environments.
Similarly, Ghana overtook the oil-rich African nation as the largest recipient of FDI in the region despite Nigeria posting a gross domestic product (GDP) that was about eight times the ‘Black Stars’.
FDI is an integral part of an open and effective economic system and a major catalyst for development. Yet, the benefits of FDI do not accrue automatically and evenly across countries, sectors and local communities.
Indeed, national policies and domestic investment architecture matter in attracting FDI to a larger number of developing countries and to enable them to reap the full benefits of FDI for national development.
The paucity of FDI in Africa’s largest economy, despite its huge endowment of natural resources, dynamic and youthful population continue to reflect the dearth of critical infrastructural facilities, and heightening insecurity, which has continued to make the environment unconducive for businesses to thrive.
For instance, FDI in Nigeria declined 36 per cent from $3.5billion to $2.2billion in 2018, according to a report from United Nations Conference on Trade and Development (UNCTAD), making it the lowest foreign inflows that Africa’s largest economy has recorded in last 13 years when the Geneva-based permanent intergovernmental body started tracking FDI data across the globe.
In the third quarter (Q3) of 2019, Nigeria received $5.36billion capital importation (inflows) compared to $5.82billion in Q2. This is the lowest amount of capital importation received in the year.
The weak performance recorded in Nigeria, Africa’s largest oil producer, suggests that the country is yet to establish the much-needed infrastructure that will reduce the bottlenecks in the operating environment, and implement reforms that will bring lasting solutions to the rising insecurity and social disorder ravaging it in the past few years to attract and facilitate FDI.
Kidnappings, killings, and social disorder seem to be the political and economic challenge bedevilling Nigeria today. The current state of insecurity and bombings especially in the Northern part has posed serious challenges to the peace and stability of Nigeria’s macroeconomic environment.
The nation has not only suffered colossal loss in terms of infrastructure, properties, and viable human lives but also economic sabotage, which leads to the displacement of FDI.
A Professor of Economics, Babcock University, and a former President, Chartered Institute of Bankers of Nigeria (CIBN), Prof. Segun Ajibola, said insecurity is a disincentive to investment because it hampers the future of business operations, while infrastructure decay increases cost of production, affects competition and erodes companies’ profitability.
“These are enablers; nobody wants to invest in a country where security is a challenge, because that can hamper the future of such investment.
“Again, infrastructure determines to a very large extent cost of operation. It also determines how profitable and viable an investment would perform in a given environment. So where infrastructure is either in a state of decay, it increases cost of production, affects competitiveness and also adds a lot of hassles to business operations.
“FDI is physical, they come not just to invest, liquidate and go, they come to invest and stay so there is long term capital importation into the country.”
According to him, for any investor to decide to invest in Nigeria in the face of so many competing environments today, the investor must be sure that there is a light at the end of the tunnel.
He argued that capital importation exists where the environment is conducive enough to generate returns on investment comparable to what is obtainable in other climes.
“We have been in a state of decay for so long. Government should intensify efforts especially in the areas of insecurity and provision of electricity these affect the cost of operation which ultimately is passed on to the consumers,” he said.
For the Chief Risk Officer of Coronation Merchant Bank, Magnus Nnoka, infrastructure deficit, and insecurity have a lot of implications on economic growth in relation to foreign direct investment.
“Foreign portfolio investors are looking for environmentally-secured economies with relevant infrastructure to aid business development. Nigeria is competing with every economy in the world; if we tackle the issues of insecurity and infrastructure and get it right, FDI will flow,” he said.
The Chief Research Officer, Investdata Consulting Limited, Ambrose Omodion, said current insecurity and infrastructural gaps have impacted negatively on the economy and discourage foreign direct investment.
“The nation’s mixed macroeconomic indices are as a result of the high cost of production resulting from poor power generation, absence of good road network, and other social amenities to facilitate ease of doing business.
“More so, the heightening insecurity has caused a shortage of food supply, as many framers are afraid of bandits and Boko Haram, which is currently affecting the free movement of goods and persons.
“The recent long-dated foreign exchange futures of the CBN will support a stable exchange rate and attract FDI and portfolio investors. If the government can seriously and sincerely address the rising insecurity and invest more in infrastructure, these will go a long way to attract new investments into the country.”
An independent investor, Amaechi Egbo, noted that the situation in Nigeria in recent times had not been conducive to foreign investors, noting that this is evident in the instability that the stock market had been recording from the last quarter of last year.
He said despite strategies and strict regulatory framework and reforms introduced by the regulators to reposition the market for growth and development, the nation’s macroeconomic challenges, especially the heightening insecurity, infrastructure deficit, government, and monetary policy issues have continued to hit hard on the equities market.
According to him, the development has propelled massive selloffs of shares and exit of foreign investors from the market.
For instance, between 2017 and 2018, foreign investors pulled out N1.77trillion from the local bourse, citing insecurity and economic uncertainties.
Specifically, a total of N435.31billion foreign portfolio investment outflow was recorded in 2017, while foreign investors withdrew a total of N642.65billion during the corresponding period in 2018.
Therefore, he urged the federal government to intensify efforts towards tackling the security challenges in Nigeria, to forestall further loss of investment.
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