Nigeria targets $600 billion in Foreign Direct Investment by 2020

Nigeria plans to attract $600 billion in Foreign Direct Investment by the threshold year of 2020 to deal with the deplorable state of the nation’s infrastructure.

It currently attracts only about $9 billion, according to Goldman Sachs. This means that the country must on the average pull in $50 billion on a yearly basis to hit its target. It also means doing an extra $41 billion better than current levels; which economic observers say may be a Herculean task.

The task is not an easy one, as research shows that Nigeria is not even in the top ten of FDI destination where the least country, Thailand received $9.6 billion in 2007, according to World Bank research contained in Global Development Finance 2008. Unsurprisingly, according to Goldman Sachs, the bulk of FDI inflows (55 percent in 2006) went to the oil and gas sector. But other sectors have also benefited, particularly the banking and infrastructure sectors.

The Nigerian economy is in dire need of diversification, having had oil and gas as mainstays for nearly half a century. Oil and gas represents 98 percent of Nigeria’s total export revenue and amounted to $58 billion in 2006, tripling the country’s trade surplus since 2002.

The research by Goldman Sachs notes that the FDI growth is on the back of Nigeria’s improving economic climate, with GDP accelerating an average seven percent in the last five years. Imports have also risen rapidly and much of this in the form of investment goods for the oil sector. Trade surplus has risen to $40bn (up from $28bn in 2006 and only $5bn in 2002). The outlook interestingly also looks favourable as official figures put targets for 2008 at 10 percent. It is expected that exports would grow to $92bn in 2008, assuming oil production of 2mn bpd. It is also believed that the current account would run a surplus of 9 percent of GDP in 2008, up from a deficit of 3 percent in 2003. The favourable outlook suggests that FDI would continue to pour in, but at what rate?

Goldman Sachs three years ago predicted that the country would figure in the top twenty economies by 2020. Soon after, it appeared on the radar of Fitch, then Standard and Poor’s, two rating agency, which gave the country high marks. Since then international investors have been looking in and even taking positions in some of the most attractive sectors of the economy. One such investor, a private equity firm even re-wrote the BRIC (Brazil, Russia, India and China) acronym as BRINC with the ‘N’ standing for Nigeria.

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Why FDI may slow

But there are situations on the ground that may slow the massive inflow envisaged by government. Chief of these impediments is government’s penchant for policy reversals. Reversals should be relics of the country’s stint with despotism and military junta. Reversals send a wrong signal about a country’s intention to be a part of the international flow of investment capital with all the benefits that come with it.

The tottering stage of the rule of law and property rights law, for example the land use laws, is yet another snag in government’s plans. In this regard, there are lessons to learn from Singapore, a country of just six million people that have made their economy a hub for FDI on account of entrenching the Rule of Law.

The ease of doing business in Nigeria needs to be given extra attention as these impacts directly on companies’ bottom line. Government is urged to stream line registration processes and double up efforts in rebuilding broken infrastructure particularly, power and road infrastructure. On this, the lesson is from Ghana, a neigbouring country now hot on investors’ destination points.

Other reasons why FDI may stall

The main factors motivating FDI into Nigeria and some other African countries, OECD observes, is the availability of natural resources in the host countries and, to a lesser extent, the size of the domestic economy. Studies have attributed this to the fact that, while gross returns on investment can be very high in Africa, the effect is more than counterbalanced by high taxes and a significant risk of capital losses.

As for the risk factors, analysts now agree that three of them may be particularly pertinent: macroeconomic instability; loss of assets due to non-enforceability of contracts; and physical destruction caused by armed conflicts.The second of these may be particularly discouraging to investors domiciled abroad, since they are generally excluded from the informal networks of agreements and enforcement that develop in the absence of a transparent judicial system.

Several other factors holding back FDI have been proposed in recent studies. Notably, the perceived sustainability of national economic policies, poor quality of public services and closed trade regimes. Even where the obstacles to FDI do not seem insurmountable, investors may have powerful incentives to adopt a wait-and- see attitude.

FDI (and especially greenfield investment) contains an important irreversible element, so where investors’ risk perception is heightened the inducement would have to be massive to make them undertake FDI as opposed to deferring their decision. This problem is compounded where a deficit of democracy, or of other kinds of political legitimacy, makes the system of government prone to sudden changes.

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Finally, a lack of effective regional trade integration efforts has been singled out as a factor. Due to this, national markets remained small and grew at a modest pace (and, in some cases, they even contracted).

Quality of FDI

In terms of quality of capital flows, Goldman Sachs are confident that much of the money that will continue to flow into Nigeria will be in a form that promotes efficient allocation. For example, they expect continued investment in Greenfield FDI into industries such as consumer goods and agriculture, rather than into the banking sector. Based on recent trends, they expect much of this investment to be supported by private international inflows, mainly from China, Russia and the Middle East. They also expect a continued steady influx of capital from the official donor sector, which will likely be targeted towards longer-term large-scale infrastructure investments, as well as Nigeria’s budget.

FDI pros and cons

A 2002 study by the OECD notes that FDI triggers technology spillovers, assists human capital formation, contributes to international trade integration, helps create a more competitive business environment and enhances enterprise development. All of these contribute to higher economic growth, which is the most potent tool for alleviating poverty in developing countries.

Moreover, beyond the strictly economic benefits, FDI may help improve environmental and social conditions in the host country by, for example, transferring “cleaner” technologies and leading to more socially responsible corporate policies.

The flipside, however, according to the report, could be a deterioration of the balance of payments as profits are repatriated (albeit often offset by incoming FDI), a lack of positive linkages with local communities, the potentially harmful environmental impact of FDI, especially in the extractive and heavy industries, social disruptions of accelerated commercialisation in less developed countries, and the effects on competition in national markets.

Moreover, some host country authorities perceive an increasing dependence on internationally operating enterprises as representing a loss of political sovereignty. Even some expected benefits may prove elusive if, for example, the host economy, in its current state of economic development, is not able to take advantage of the technologies or know-how transferred through FDI.

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