Foreign Direct Investment (FDI), the term that describes when a foreign entity invests in or acquires a business asset in Nigeria, has often been put forward as the panacea to our nation's economic underdevelopment.
Foreign investors have always been interested in Nigeria. In fact, the creation of the 19th-century colonial state which metamorphosed into Nigeria was facilitated by an international company, the Royal Niger Company. Over the decades, the Nigerian Government has adopted several policies to attract FDI to the nation. In the mid-80s, the Ibrahim Babangida regime implemented the structural adjustment programme, aimed at liberalizing various sectors of the economy and subsequently attracting foreign investors to the manufacturing industry. This policy, although widely criticised at the time, helped to stimulate FDI into the economy. World Bank data estimates that FDI increased from $200 million in 1970 to $2 billion in 1994. Unfortunately, the nullification of 1993 general elections, its attendant crisis, and General Sani Abacha's takeover resulted in a reduction in FDI inflows from the year 1996 to 1999.
The reinstitution of democratic governance in 1999 coupled with the introduction of various financial and economic reforms in the country again boosted FDI. National Bureau of Statistics (NBS) data suggest that by 2008, FDI had risen to $8 billion.
In the decade leading up to 2014, Nigeria consistently ranked among the top three destinations for FDI in Africa. However, the reverse has been the case in more recent years. According to the latest edition of the EY Africa Attractiveness Index (AAI), an index which measures foreign direct investment attractiveness of African countries, the country now ranks 17th on the continent. And according to the NBS, FDI fell to just $1 billion in 2016 – the same amount the government raised in a single Eurobond issue.
So what is responsible for the drastic change in Nigeria’s FDI fortunes?
One major factor is Nigeria's strong economic dependence on oil, which in turn means that the attractiveness of the country rises and falls with the price of oil. The price of oil attained peaked in 2014, the same year Nigeria recorded its highest FDI inflow this decade. As the price of oil fell, FDI flows into Nigeria dried up. It is therefore not unsurprising that the recent slight improvement in FDI has coincided with the oil recovery.
Healthy economies attract foreign investors, and Nigeria has struggled recently.
Furthermore, the prolonged state of insecurity in the country does little to attract foreign investors. The country continues to experience violent skirmishes in the Middle Belt, secession threats in the South East and militant attacks in the South-South. Meanwhile, the Boko Haram terror group continues to carry out attacks in the North East. Very few foreign companies would be willing to jeopardise the lives of their employees and assets in such state of violence and volatility.
Nigeria’s plummeting FDI situation is worsened by a poor investment climate characterised by overly stringent or impromptu government policies, bureaucratic bottlenecks for securing permits, and a weak legal framework. MTN, one of the most successful foreign investors in Nigeria in recent times was slammed with a $5.2 billion fine in 2015 for failing to disconnect unregistered users. Such draconian punishment cannot be encouraging for would-be investors, many of whom already hold the notion that they are regarded as cash cows for exploitation by African governments.
The nation’s infrastructure deficit is the final nail in the coffin. The absence of stable power means the manufacturers have to factor the high costs of alternative energy sources into their business models. Add this to the cost of transporting products across the country, or attempting to export via our highly inefficient ports, and you get a situation where prices are exorbitant, and products might not be competitive enough to generate adequate returns on investments. In addition to these, many investors are fearful that despite a large population, there is no viable market for their products due to the high rate of poverty, unemployment, and low disposable incomes.
Given all of these, it is not difficult to see why many potential investors have opted for other markets like Morocco, Kenya, and South Africa.
There is hope; the federal government has set to work to correct these anomalies. The achievement of the Presidential Enabling Business Environment Council in improving the ease of doing business in Nigeria is a start. Efforts to expand the tax base, solve credit market imperfections, and resolve legislative barriers to investment are being pursued – to different degrees of success.
A country of Nigeria's economic and social potential ought to attract more long-term foreign investment. To do so, however, we need to address the underlying structural bottlenecks that make Nigeria such a difficult country to do business.