Re-ordering the investment environment

The widely reported sharp drop in Foreign Direct Investment to the country, as recorded by the National Bureau of Statistics (NBS) is worrisome, but symptomatic of the absence of holistic measures by government to boost the national economy. Despite lots of official rhetoric aimed at attracting foreign businesses and investments into the country, government has consistently failed to back this up with concrete measures; or it has neglected to do the needful to propel the economy and make it an investors’ haven.

Earlier this month, the National Bureau of Statistics released data indicating that Nigeria generated a total of $698.7 million from Foreign Direct Investment (FDI) in 2021. This NBS data shows the FDI generated in 2021 was the lowest the country recorded in 10 years. The FDI is one of the three major types of investment and a critical source of capital inflow into the country.

Other sources include foreign portfolio investment, foreign loans and trade credits. The NBS defines FDI as an investment where the investor has some control or a significant degree of influence on the management of a domestic enterprise. It notes that the FDI occurs when the investor has enough equity in the enterprise to entitle them to 10 per cent or more of the voting rights in that company. A breakdown of FDI in Nigeria over the last 10 years shows that in 2012, FDI stood at $2.60 billion. It declined to $1.27 billion in 2013 but rose to $2.27 billion in 2014.

The FDI fell again in 2015 to $1.41 billion. It fell further to $1.04 billion in 2016 and to $981.75 million in 2017. Further analysis of NBS data revealed that FDI again rose to $1.19 billion in 2018 but dropped by $256 million to $934.34 million in 2019. The latest capital importation report from the bureau stated that FDI fell by $332 million to $698.78 million in 2021 from $1.028 billion in 2020.

The report also showed that 24 states in Nigeria failed to attract any foreign investment last year. These states are: Adamawa, Bauchi, Bayelsa, Benue, Borno, Cross River, Ebonyi, Edo, Enugu, Gombe, Imo, Jigawa, Kaduna, Katsina, Kebbi, Kogi, Nasarawa, Niger, Ondo, Plateau, Sokoto, Taraba, Yobe and Zamfara. Also, 10 out of the 24 states failed to attract foreign investments in the last three years. The states are: Bayelsa, Ebonyi, Gombe, Jigawa, Kebbi, Kogi, Plateau, Taraba, Yobe and Zamfara.

Alarming as the statistics show, they are hardly surprising considering the absence of an environment conducive for business to thrive. The other day, Minister of Industry, Trade and Investment, Niyi Adebayo, expressed concern over the relocation of registered companies in Nigeria to other African nations, many of which have increased their capital allocation to companies and have thus taken away lots of investment from Nigeria. Although he promised to do everything possible to reverse the trend, nothing concrete is being done towards that goal.

In particular, economists blame capital flight mainly but not wholly on the on-going insecurity in the land and inadequacy of electricity in Nigeria. The high cost of getting power through private initiatives makes the final product unprofitable. It is trite that no serious development can emerge from the kind of chaotic, deadly and dangerous situation that prevails in many parts of the country, following daring and persistent criminal operations by terrorists, bandits and kidnappers, to which government appears helpless.

Other causes of capital flight include policy inconsistency. Years ago, Dunlop Nigeria Limited established a state of the art tyre manufacturing factory in Lagos, commissioned by the then President, Olusegun Obasanjo. Five weeks later, the same government approved importation of tyres from abroad, thus crashing prices and rendering Dunlop to turn their factories to sales depots for tyres from their factories abroad. Similar fate forced Michelin, Berec Batteries and other companies to relocate to neighbouring countries. Till date, government is yet to find lasting solution to the inconsistencies.

Also, many investors have been affected by the Coronavirus pandemic, which has generally caused a slump in economic activities. More importantly, the investment sector cannot operate without reliable, adequate and affordable electricity. This year alone, the country has experienced failure of the national electricity grid about four times during which less than 300 MW was produced for a nation that needs no less than 10,000 MW. That is yet another stumbling block for Foreign Direct Investment.

The investment climate is also beset with foreign exchange hazards marked by constant devaluation of the naira by the government. Since 1990, the value of the naira has been on the decline with no respite in sight. The Deputy President of the Lagos Chamber of Commerce, Gabriel Idahosa, noted that investors were reluctant to invest in a country where the cost of doing business is high. The unpredictability of the value of the naira makes investors skeptical of investing in Nigeria because the value of their returns would decline in the future due to constant naira devaluation. Other factors militating against foreign investment include but not limited to the inefficient port, rail and transportation systems.

Also, Nigeria’s income tax of about 32.5 per cent is the highest in the world, compared with about 15 per cent associated with most other countries. The unfriendly nature of the tax system in a struggling country motivates investors to explore other countries where taxes are low. Investors are looking for economies that are growing. Prior to last year, the Nigerian economy contracted in 2020. Foreign Direct Investment goes to countries with very good investment climate. Among those things investors are looking for are economic and political stability. They are also looking at the rate of growth of the economy.

If government can guarantee security and fix electricity to a reasonable extent, it would have no need to go too far in attracting investors, both local and foreign.