Eclipse of FDI and Nigeria’s endgame with recession
The uncertainties that shrouded Nigeria’s ability to attract Foreign Direct Investments (FDI) were visible signs of greater calamity in the offing. Finally it dawned on the economy. But remember, Nigeria would have avoided the development from snowballing into the present predicament.
From 2011 to 2015, there was a record of N11 trillion loss in foreign investment inflow in a report corroborated the Central Bank of Nigeria (CBN), Nigerian Bureau of Statistics and the United Nations Conference on Trade and Development (UNCTAD). Those were subtle signs. Six months later, the real challenge matured to unsettle the country, culminating to economic recession.
Basically, from 2014 till date, there was a dramatic turn of events, which bases were corruption, non-committal to investments in infrastructure by government and the age-long dependence on oil economy.
In fact, the renewed pressure from declining foreign investment came as a result of the volatility in international price of crude oil- hitting revenue and the sovereign’s capacity to discharge its fiscal obligations; and the plummeted foreign exchange reserves, as well as hindered reserve accretion drive. The implication was that at one point, the country could neither fulfill obligations of Letters of Credit in full and on time, while importation processes for legitimate items to keep businesses alive were marred by shortage of foreign currencies.
The first economic segment to get the hard signal in the last two years was the financial market. Foreign portfolios investors pulled out huge billions of dollars and never returned. Indeed, CBN Governor, Godwin Emefiele recently noted that Nigeria’s loss to capital flight was part of the more than $20b estimated loss in foreign investments in emerging markets since last year.
Since 2014, Nigeria has fallen behind many African countries in getting the needed foreign investments, particularly South Africa.
The country’s delisting by JP Morgan from its Government Bond Index – Emerging Markets (GBI –EM Bonds) in October marked the major turning point in the inflows of investment for the country.
In the second quarter report of the Gross Domestic Product (GDP), the challenges were obvious. The capital importation, which is the flow of cash (foreign currency) into the economy for investment as equity or loan, including machinery and equipment for investment as equity or loan, fell to a new record low.
The record of capital importation into Nigeria dropped by $2.05b between June 2015 and 2016, an analysis of Capital Importation Report has shown.
This came as the figures for the second quarter of 2016 was estimated at $647.1million, representing 75.73 per cent decline from the volume of capital inflows in the corresponding period of 2015. The amount recorded in the second quarter also represented 8.98 per cent decline, relative to the first quarter figures at $711m.
The development was sequel to foreign exchange crisis that ensued with the fall of crude oil prices, the sole earner for Nigeria, which also accounts for over 90 per cent of foreign exchange. Since the third quarter of 2014, when the country recorded $4.5b inflow, it has been on steady decline below $3b per quarter.
Following the trickling effects of the declining oil prices in the fourth quarter of 2014, total inflow was estimated at $14.9b, but as the development got worse, total foreign investment inflow in 2015 fell to $9.6b, representing about 35 per cent decline.
Precisely, in 2015, the first quarter record of foreign investment inflow fell to $2.7b, from $4.5b in the fourth quarter of 2014; the second quarter dropped further to $2.66b. But the optimism that greeted the new administration helped to rebound foreign investment inflow, which later dampened with delay in economic direction and persistent fall in oil prices. The fourth quarter of 2015 ended with a paltry $1.6b capital importation.
According to the Nigerian Bureau of Statistics, the figure marked the lowest level of capital imported into the economy on record; the largest year-on-year decrease; and the second consecutive quarter in which these records have been set.
It noted that the persistent decline in the value of capital imported into the economy is symptomatic of the difficult period the country has been going through.
“The second quarter saw the economy enter into the first recession during the rebased period (according to the technical definition of two consecutive periods of decline).
“This may suggest less profitable opportunities for investment. In addition, in the second quarter there was considerable uncertainty surrounding future exchange rate policy, which may have deterred investors.
“The Naira was allowed to depreciate towards the end of the quarter. These factors were likely to have contributed to the record decline in capital importation,” the NBS report noted.
The year-on-year decline of capital importation also cut across each broad type-Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI) and Other Investment.
However, in comparison with other types, FPI recorded by far the largest decline- 88.76 per cent year-on-year, against 37.00 per cent and 1.22 per cent for FDI and Other Investment respectively.
An analysis of quarter-on-quarter basis, FDI recorded the largest decline of 23.75 per cent ($133.03m), compared with a decline of 9.49 per cent ($245.32m) for FPI and an increase of 1.24 per cent ($268.77) for other Investment.
Consequently, other Investment overtook FPI as the largest component of capital importation, and accounted for 41.53 per cent, compared with shares of 37.91 per cent and 20.56 per cent for FPI and FDI.
In the corresponding period of 2015, Portfolio investment accounted for 81.88 per cent of total investment, affirming that FPI has been the hardest hit by recent economic events.
As in all previous quarters, Equity investments dominated 83.18 per cent FPI’s capital importation, but slightly lower its share a year ago at 84.56 per cent, but higher than the first quarter record.
However, like in each quarter over the past two years, FDI accounted for the smallest share of imported capital, with $133.02m, representing 20.56 per cent of the total. For the first time since the series began, Equity stake accounted for the entirety of FDI, as no capital was imported in the form of other Capital.