By Peter Egwuatu
The contribution of foreign direct investments, FDI, to the nation’s economic growth recorded a major setback in the six months period ended June 2020 (H1’20) as inflows dropped by 29.7 percent to N137.6 billion ($362.84 million) from N178.6 billion ($470.51 million) in the corresponding period of 2019(H1’19).
This represents the highest Year-on-Year, YoY, decline in the last three years.
FDI represents the most durable form of foreign investment inflow providing both employment and financial resources to the economy, unlike foreign portfolio investments, FPI, which would fly away within few days at the slightest sign of threat.
The FDI decline adversely impacted the nation’s foreign reserves which fell by 17.2 percent to N13.7 trillion ($36.1 billion) in H1’20 from N16.3 trillion ($43.6 billion) in H1’19.
Development economists and financial analysts attributed the development in FDI in H1’20 to the sharp decline in crude oil earnings and the negative impact of Coronavirus (COVID-19) pandemic on the global economy.
Financial Vanguard analysis of the data obtained from the National Bureau of Statistics, NBS, revealed that Nigeria’s economy recorded mixed performance in FDI flows since 2017 after it exited its second recession.
The NBS data shows that before the decline in HI’20, FDI had declined marginally by 1.9 percent in H2’19 from $470.51 million (N178.6 billion) in H1’19.
In H2’18 the country had recorded a sharp rise in FDI at 37.2 percent to $696.71 million (N264.5 billion) from $507.99 million (N192.7 billion) in H1’18.
The trend in foreign reserves on half yearly basis also shows direct correlation with the FDI trend as it also declined in H2’19 by 11.7 percent from $43.6 billion (N16.34 trillion) in H1’19, while it rose in H1’19 by 37.2 percent to $43.6 billion from N43.1 billion (N16.3 trillion) in H2’18.
Financial experts and analysts have projected that Nigeria may not be out of the wood in the third quarter of 2020, Q3’20 with regards to decline in foreign reserves as decline in FD1 is expected to put additional pressure on foreign exchange, FX, earnings.
The experts and analysts have noted that given that Nigeria remains a major import dependent economy this will also exert further pressure on the exchange rate and cause a spike in inflation on the back of rising cost of goods and services.
Reacting to the trend in FDI, Uche Uwaleke, a Financial Economist and Professor of capital market at the Nasarawa State University, said: “The decline in FDI in Q1 and especially in Q2 of 2020 has a lot to do with the sharp decline in crude oil price and the negative impact of COVID’19 on the global economy.
“The major countries of origin for foreign investments in Nigeria include the UK, the USA, Singapore, Netherlands and South Africa. All these countries have reported negative growth in real GDP in H1 2020. So, it is not surprising that capital inflows to Nigeria from these countries have declined.
In his own comment, Victor Chiazor, analyst and head of Research and Investment, at Fidelity Securities Limited, FSL said: “Foreign direct investment has been on the decline as a result of the declining confidence investors have towards the growth prospects of the Nigerian economy. Investors will continue to maintain their risk off sentiments into the remaining part of the year given the visible headwinds which the economy faces. This in turn will affect foreign inflows for both FDI’s and Foreign Portfolio Investment ( FPI’s) which is expected to put addition pressure on our FX earnings accruals to our foreign reserves especially given the drop in oil revenue.
Continuing, he said: “Given that Nigeria remains a major import dependent economy this will also exert negative pressure on our exchange rate and possible cause a spike in inflation on the back of rising cost of goods and services.”
On way forward to improvement of FDI, he however stated that with ongoing opening of the economy the country may gradually see improvement in FDI in the long run not for short run adding : “In the end, the case for an improvement in FDI and FPI inflow as well as an improvement in unemployment numbers will require proper investment friendly policy statements and implementation from the federal government as well as support from the organized private sector if the we aim to recover in the near term.”
In his remark, Economist and Executive Vice Chairman, HIGH CAP Securities Limited, Mr David Adonri, said: “ Both FDI and FPI are declining due to erosion of investors’ confidence in the economy. Nigeria’s economy started declining even before the onset of COVID-19. In January 2020, Moody’s & Fitch downgraded Nigeria from stable to negative. COVID-19 only worsened the situation and the economy is at the verge of entering the much dreaded stage of stagflation.
“Emerging from current economic crisis will be tortuous due to current fiscal debt overhang, currency crisis, import dependence, weak crude oil market and pervasive insecurity. World Bank also claims that CBN has been unable to remit six billion dollars backlog of investment proceeds to foreign investors.
All these negative factors have eroded investors’ confidence. Investors are also not confident that this administration can speedily take the economy out of the crisis hence, the exodus. Non implementation of Nigeria Industrial Revolution Plan of 2014 (NIRP) and Economic Recovery and Growth Plan of 2017 (ERGP) are indications that current Nigeria Economic Sustainability Plan (NESP) may just suffer the same fate as previous ones.”
On the way forward, he said, “Nigeria need to explore survival strategies as businesses downsize and escalating food inflation bites. To restore investors confidence in the economy, first and foremost, CBN must remit backlog of investment proceeds to foreign investors. This will reassure their confidence in Nigeria. Secondly, the mismanagement of public foreign exchange by CBN should stop. Nigeria is financially matured enough to have a formal Forex market executed through existing Stocks and Commodity Exchanges where allocative efficiency of this scarce resource can be guaranteed.
“On the fiscal side, federal government should rise above ethnic pettiness and declare state of emergency in Northern Nigeria. Nigerians should be mobilized to fight the numerous wars ravaging the North so that farm security and full commercial activities can be restored. Overpopulation of the North which is fuelling destitution and insecurity in the country must be confronted headlong.
Since insecurity is crippling domestic production and escalating inflation, FGN should end the ill conceived border closure. Nigerians have also seen the deceit in the purported fight against corruption. FGN needs to purge the entire public service of corruption for investors to take the country seriously.
Finally, after correcting the numerous defects in NIRP, ERGP and NESP, FGN should engage with the capital market on implementing them with undiminished intensity.”
Reacting as well, analyst and Chief Operating Officer at InvestData Limited, Ambrose Omordion, said “The nation’s economic realities has been a function of policy implementation problem and inconsistent reforms agenda that had led to summersaults and mismatch of policies before the breakout of pandemic exposed the weak agenda of the government and its economic managers. The prevailing economic uncertainty and negative marcoeconomic indices in the face of continued mismatch policies like government stimulus packages for critical sectors while the fundamental factors that drive high cost living and production are being hike especially the recent increase in electricity tariff and pump price of fuel that have direct impact on the system without effective planning.”
On way forward, Omordion said: “ Government need to review the current policies and promote coordination among policy maker. The main reasons for FDI are insecurity, economic uncertainty and mismatch policies among other variables.”