The Foreign Direct Investment in Nigeria dropped by 32% in 2021 which is about $698.8 million lower than the $1.03 billion recorded in 2020.
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The record of $698.8 from FDIs in 2021 is the lowest level on record at the moment and this data is from Nairalytics from the Central Bank of Nigeria (CBN).
A year-on-year comparison shows that FDIs into Nigeria dropped by 32% and this is also the fourth time Nigeria has recorded foreign direct investment below $1 billion in the past 15 years.
Foreign Direct Investment means purchases made by a company or an investor from another country in a Nigerian company. According to the Organization of Economic Co-operation and Development (OECD), FDI is a pivotal part of an open and effective international economic system and a major catalyst to the growth and development of a country.
The first time was in 2010 following a backdrop of the 2008 global financial crisis which saw the country’s direct investment flow drop from $3.33 billion recorded in 2009 to about $728.9 million in 2010. The FDIs also fell below the $1 billion mark in 2017, 2019 and then 2021.
This drop in the FDIs could be as a result of the effect of the COVID-19 pandemic on the Nigerian economy and this lead to a contraction of the economy and contingents of downturns on the macro level.
In recent years, Nigeria has been suffering from dwindling foreign inflows in recent years and this is putting significant pressure on the FX liquidity of the country as surging demand for dollar in the economy gives rise to a recurrent negative balance of payments for 10 quarters.
Most economies target increased FDI due to its importance in driving economic growth and the FDIs helps to boost the creation of jobs in any country as investors will build new companies in the country which will lead to increase in income, more purchasing power and also the growth and development of the country.
Why are things like this presently?
One thing that is contributing to the recent constant decline in the ability for Nigeria to attract direct investments from foreign soil is the level of insecurity in most parts of the country starting from the insurgency in the north, herdsmen and bandit attack, armed robbery, kidnapping and many others.
The level of insecurity in the country is alarming and this has been a major setback for the country when it comes to direct investments even though it has a significant number of startups in the tech space with the capacity to attract foreign investors.
Despite the CBN’s numerous policies geared towards attracting foreign inflows into the economy, the country has failed to improve its FDI.
Another thing that has been a setback to Nigeria is the Nigerian business environment. Nigeria is ranked number 131 among the 190 economies in the ease of doing business and this has really hindered the country’s progress in attracting investors coupled with the inflation surging at record highs.
Also, it is becoming more difficult to get low-medium risk businesses in the country that will give significant returns in dollar term. Specifically, the business environment in Nigeria is impeded by decline in the purchasing power of average Nigerians making more people poorer on the per capita basis.
The high rate of poor people in the country has led to a smaller revenue market in dollar terms which brought about a more compressed margin after taking into account the huge cost of operation due to inflation.
Also, the problem of exchange rate has made it more difficult for foreigners to repatriate their funds and get a return that is worthwhile.
What investors do now
The official FDI may not really take note of all the monies invested in Nigeria entities. Some reports say that Nigerian startups rose over $1.6 billion in funding in 2021 and most of these funds were invested directly into the companies in form of seed/series funding.
But reports say that the total amount captured in the official FDI data is below the $1 billion mark. Looking at what we said initially, it is seen that the investors are now changing from the traditional means of investing which involves the direct exchange of monies and assets and they are now investing in local companies without actually moving the funds into the country even with the company’s headquarter being in Nigeria.
A lot of Nigerian tech startups raised huge amount in funding in the previous year and some of which include the like of Opay, Ventures Platform, Flutterwave etc.
What are people saying?
An international Financial Analyst, Opeoluwa Dapo-Thomas said “at the moment, we have a weak macroeconomic environment, policy inconsistency and the absence of well-defined strategy for FDI as a component of economic growth. Generally, investors are looking for where to throw money and gain returns but the systematic risk in Nigeria is now high given the fact that some investors struggled to repatriate their investment during the COVID periods. There are a lot of places in the world to invest in; Nigeria is yet to show why they are worthy to be selected from the rest.”
A personal finance analyst highlighted some factors contributing to the low foreign direct investments in Nigeria. He said that the setback in the oil and gas investment due to climate change focus in the West had a great effect on the FDI of Nigeria. He also added that capital controls and bad optics of MTN being charged excessive fines have also play a role in discouraging foreign investment sentiment in the Nigerian economy.
He went further to explain that to change this, policies that promote trade are to be passed, restructuring capital controls, solving infrastructure deficit, curbing the issue of the issue of insecurity and also fully implementing the Petroleum Industry Act.