Prospects of FDI and the Nigerian economy in 2008

Available statistics show that the total stock of FDI to Nigeria in 2003 which amounted to $2.4bn, accounted for 43 percent of gross domestic products in Nigeria.

In 2004 alone, Nigeria's FDI stood at $1.04bn with the United States, representing about 15 percent, United Kingdom 15 percent, Germany 7.3 percent and China 7.1 percent. Under the same period under review, the country recorded real Gross Domestic Product (GDP) of 5.3 percent in 2006 and with GDP per capital of $1,500 and in 2007 it was 6.7 per cent. FDI is the acquisition of plant and equipment in a foreign country, its parent company equity, and net outstanding loans to their foreign affiliates.

The significance of this trend is that the emerging Nigeria would record corresponding boosts in some vital economic indices like employment, capital formation and price level for an emerging economy like Nigeria.

Some fundamental reasons have been identified as being the main drivers of the FDI to Nigeria. The driving factors include: lure of globalization; the issues of poverty; high prices and buoyant global demand for oil and other minerals; increased cross-border mergers and acquisitions which was tripled in the first half of 2006 and recorded more than 400 percent annual increase in 2007 over its value in the previous year; and misguided policies of the government.

Indeed, the huge population of Nigeria, market size, location as Africa's investment nerve center and abundant natural resources prove extremely attractive to foreign investment, particularly in the oil sector where both fiscal and monetary econometric policy in the past were contaminated by the unstable political thinking and profit.

The reasons for the said drivers of FDI into the Nigerian economy are not unconnected to the surge in prices of the oil and gas sector of the Nigerian economy in recent years. There are also opportunities in accompanying the enthronement of democracy in the country eight years ago. With democratic governance came the hope of a stable market for foreign investment in Nigeria.

World Investment Report 2007, Transnational Corporations, Extractive Industries and Development add that the value of cross-border mergers and acquisitions (M&A) in Africa also reached a record level of $18 billion in 2006. About half of those M&As were accounted for by transnational corporations from developing Asia. Greenfield and expansion investments also grew significantly in Africa. African FDI outflows also reached a record level in 2006 of $8 billion, up from $2 billion in 2005, with South African firms being the main investors from the region. FDI inflows exceeded $1 billion in eight African countries and rose in 33 countries in 2006. The top ten host African nations received about 90 percent, or $32 billion, of the continent's inflows.

Both cross-border M&As and greenfield/expansion investments played an important role in the top host countries, particularly Egypt and Nigeria. Nigeria which recorded $3.4 and $5.4 in 2005 and 2006 respectively was the main destination in West Africa, dominated by FDI in its oil industry, where investment came mostly from China.

According to the World Bank 2006 index of economic freedom report, "the oil sector accounts for about one third of annual GDP of Nigeria, but provides over 70 percent of federal revenues and 90 percent of exports".

Analysis of the data above reveals clearly that Nigeria ranked second after Egypt among top ten African countries that received FDI inflows into the region for 2005 and 2006. What bothers economic experts at this point is: what economic conditions might have favoured Egypt receiving the largest in 2005 and at par with Nigeria in 2006 given the former geographical location in the volatile Middle East region. Meanwhile, economic analysts are unanimously of the view that Egypt may have been preferred to Nigeria by foreign investors given Egypt's relative political stability; infrastructure development; and relative consistency in policy formulation and implementation.

Both cross-border mergers and acquisition and Greenfield/expansion investments played an important role in the top host countries, particularly Egypt and Nigeria. In Egypt, the leading recipient in the region, inflows exceeded $10 billion, 80 percent of which were in non-oil activities. Nigeria was the main destination in West Africa, dominated by FDI in its oil industry, where investment came mostly from China.

Meanwhile, as the FDIs continue to grow in Nigeria, its major negative impacts on the nation's economic growth have been found to include but not limited to: corruption, and political fallout, socioeconomic; environmental; legal and cultural; and labour variables. The influx of FDI to Nigeria have been deterred by factors such as mutual distrust, street crimes, bribery, non observance of the rule of law, long-standing deep seated tribalism and the level of gross underdevelopment in the oil rich regions of Nigeria. These singularly or collectively continue to play determining role in the rate of FDI in Nigeria. However, notwithstanding the discouraging variables above, numerous sources of prospects exist for increased FDI in Nigeria in the unfolding year 2008.

A major identified sure source of FDI in 2008 remains diaspora-targeted remittances in the five years of 2006 - 2010. The Nigerian economy is expected to attract an average of $20bn dispora remittances in this period; that is only two years spent. Indicators to this emerged from the Central Bank of Nigeria (CBN) governor Chukwuma Soludo’s pronouncement recently that diaspora remittances bring about $4bn home in form of FDI yearly. The CBN chief also revealed that capital inflows to Nigeria were doubling every year with about $2.5bn recorded in 2006 from portfolio and non-oil sectors.

Delivering its year end speech last month, the executive secretary of Nigeria Investment Promotion Commission (NIPC) Mustapha Bello disclosed that the commission attracts N232bn annually as FDI to Nigeria.

There is the prospect from Nigerian government’s effort at trying to attract foreign investors with generous incentives and targeting the industries that are holding back economic growth and development the most. This draws from the relevant laws allowing 100 percent foreign ownership of businesses and unhindered repatriation of capital. Having openly admitted that doing business in Nigeria is difficult, either due to poor infrastructure or insecurity in some areas, it is seriously working to make up in these areas with an effusively welcoming attitude towards investors. This is particularly in the area of infrastructure improvement and image building.

The government again recently entered into trade agreements with prominent European countries and the United States. These agreements like the Cotonou agreement in particular, are aimed at promoting FDI in Nigeria.

Hope is also on the way from the Millennium Cities Initiative, and Millennium Villages Project (MVP), which aims at assisting seven cities (including Akure in Nigeria), and villages to become economically viable.

However, utilizing these prospects is not without some fundamental challenges prominent among which are: continuing power cutting to businesses; tough operating environment (especially in the Niger Delta region) characterized by violence, conflict, corruption, crime and unemployment; and decaying infrastructure among others. Meanwhile, the question being asked by economic analysts is of course, whether actual investment projects will take place and contribute significantly to economic growth and development in Nigeria in the unfolding year 2008 and beyond, given the pace of government activities which remain sluggish.

The efforts so far described above can however be expected to do just that. It would largely depend on the perceived government attitude by foreign investors and its over all readiness to develop the economy. To attract more FDI, especially in manufacturing and services, the country needs to improve its infrastructure base and identify and promote real investment opportunities outside its state capital cities. Again, the regulatory and business environment should be rendered more competitive while some of the stringent measures such as double tax laws and tariffs should be relaxed.