States’ poor economic policies spurn capital importation

Clara Nwachukwu

  • Political risks, insecurity fuel low ingress
  • Lagos is preferred investment destination
  • Financial services lead, as petroleum shrinks

Foreign perception of Nigeria’s economic environment in relation to political risks associated with insecurity and investment regulation are largely responsible for the low capital importation into the country in the first half (H1) of 2021.

Also, poor economic policy enunciation by state governments to diversify their revenue base and position their respective subnational economies for capital importation and foreign direct investment (FDIs), make them more dependent on the national for their sustenance, a development that increases pressure on the Federal Government to continue to borrow to sustain the nation.

Although the total value represents a sharp fall of over 54.06% quarter-on-quarter, and -32.38% year-on-year to Q2 2020, some states still managed to hold their own in diversifying their economies to boost internally-generated revenue (IGR) thereby opening up their states for foreign capital inflow.

Inflow to states

Specifically, the Nigerian Capital Importation report for first (Q1) and second (Q2) 2021, released Wednesday by the National Bureau of Statistics (NBS), reveals that only eight out of the 36 states including the Federal Capital Territory (FCT) Abuja, accounted for the total $1,905.89, and $875.62 imported into the country.

StatesQ1 (M)Q2 (M)
ABUJA (FCT)$318.40$95.26
ANAMBRA           $4.05 

 Lagos State in South West Nigeria emerged the preferred destination for capital importation in H1 as shown in the table above, accounting for $1,578.31billion, and $780.06million for Q1 and Q2, respectively.

Experts believe this high level of capital importation demonstrates the level of confidence in the state and its economic policies, given Governor Babajide Sanwo-Olu’s constant interactions with the investment community and efforts to ensure it remains the preferred destination for investments in Nigeria.

Indeed, with a gross domestic product (GDP) estimated at over N1trillion, Lagos was ranked the 7th largest economy in Africa in April 2019, and accounts for over 60% of Nigeria’s industrial/commercial activities.

Abuja in North Central came a very distant second with $318.40million, and $95.26million inflow during the period in review, and all other states were below the $5million mark.

Broken further down, other states like Anambra witnessed the third largest capital importation of $4.05million (Q1), South East, a demonstration of Governor Willie Obiano’s resolve to expand the subnational economy, including building an international airport to attract investors. 

Kano attracted $2.40million (Q1), North West; Delta $1.00million (Q1); Akwa Ibom $0.74 (Q1), South South; Ogun $0.76million (Q1), and $0.3million (Q2), South West; and Kwara $0.23 (Q1), North Central. There was no capital importation recorded for the North East.  

Risk perception    

To understand the importance of governance in sustainable economic development, the World Bank’s Worldwide Governance Indicators notes that “perceptions of the quality of public services, the quality of the civil service, and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies.”

As a result, experts argue that attracting private capital to sub-Saharan Africa (SSA), of which Nigeria is the leading economy, is complicated by negative investor perceptions and investment regulations about the region.  

“Among the most significant impediments to inward investment is political risk (whether perceived or real), and the fact that reforms in Africa seem to take some considerable time to enhance the credibility of governments. This is often the result of several serious policy reversals in the past.”

They also urged countries to reduce costs of doing business by improving the quality of public infrastructure, investing in people, and reducing corruption. “But most important is the commitment to ensuring macroeconomic stability and continued reform of the African economies. This is critical for attracting sustainable long-term foreign investment to Africa.” 

Accepting that capital flows to emerging market economies remain uncertain, the Central Bank of Nigeria (CBN), in its communiqué at the end of its Monetary Policy Committee (MPC) Meeting on Tuesday, said: The overall outlook for both the global and domestic economies, remain clouded with downside risks despite the upbeat forecast for a speedy recovery. 

Specifically, the communiqué signed by the CBN Governor, Godwin Emefiele, reads: “The MPC was concerned about the broad level of insecurity across the country, noting its impact on business confidence and overall economic activities. It noted the persisting insecurity in key commodity producing areas and urged the Federal Government to intensify security surveillance in farming communities to ensure uninterrupted farming activities.”

Similarly, a report, Economic Diversification in Africa: How and Why It Matters, published by the Carnegie Endowment for International Peace, last month, specifically linked governancewith economic diversification.

The report looked at diversification from three dimensions, namely; the expansion of economic sectors to boost employment and production or GDP growth; international trade or exports, and lastly, fiscal diversification through expanding government revenue sources and public expenditure targets.

To these, the Central Bank’s MPC said: “Available data and forecasts for key macroeconomic variables for the Nigerian economy suggest a broad improvement for the rest of the year,” adding that this is hinged on continued progress with the containment of the COVID-19 pandemic, monetary and fiscal support as well as containing the escalating security crisis across the country.

Emphasising the importance of infrastructure development, the MPC noted that aside from insecurity driving farmers away from the farm land, thereby spiking food inflation, poor infrastructure also contributes to the rising domestic price levels.

Members therefore called on the Federal Government to prioritize investment in public infrastructure such as improved transportation networks, power supply and telecommunication facilities, which they said could be sourced through Public-Private-Partnerships (PPPs), as well as the issuance of diaspora bonds.

As a result of the above and a host of others, by Country of Origin, the NBS Capital Importation report indicates that Nigeria’s foreign allies are reigning in on their investment in the economy to the effect that the United Kingdom emerged as the top source of capital investment in Nigeria in Q2 2021 with $310.26million. This accounted for 35.43% of the total capital inflow in Q2 2021.

Among the top 10 countries in H1 2021 are as listed below for the two quarters in review:

South Africa$166.52$212.39
United States $83.41
Hong Kong$28.62 
British Virgin Islands$23.94 
Germany    $22.94 
Belgium $25.72
Guinea $20.00
Sudan $15.00

Meanwhile, to reinforce the severity of the country’s insecurity situation, British Prime Minister, Boris Johnson, yesterday, agreed to lend a helping hand to Nigeria in its war against terrorism.

Johnson stated this while holding bilateral talks at the sidelines of the Global Education Summit in London.

The offer comes just as the United States (US) lawmakers are blocking moves to a proposed sale of attack helicopters to Nigeria, citing poor human rights record of  President Muhammadu Buhari’s government, as it grapples with multiple security crises.

This is even as Nigeria had recently received six out of the 12 Tucano jet fighters purchased from the US Government.

Johnson assured Buhari, “We are available to help,” in addition to finding ways to increase trade between the two countries, develop solar and wind power, the leadership of the Commonwealth going forward, and other matters of mutual interest. 

Already, the UK is the highest country of origin for capital importation into Nigeria.

However,  US  lawmakers on the Senate Foreign Relations Committee, according to a report reviewed by Foreign Policy magazine, have reportedly delayed clearing a proposed sale of 12 AH-1 Cobra attack helicopters and accompanying defence systems worth $875 million to the Nigerian military citing human rights abuses and a host of others.

Sectoral inflow destinations 

Similarly, the NBS report indicates that the largest amount of capital importation by type was received through Portfolio investment, which accounted for 62.97% ($551.37million) of total capital importation, followed by Other Investment, which accounted for 28.13% ($246.27million) of total capital imported and Foreign Direct Investment (FDI), which accounted for 8.90% ($77.97million) of total capital imported in Q2 2021.

By sector, Capital importation by Banking dominated in Q2 2021 reaching $296.51million of the total capital importation in Q2 2021, as shown below:

Drilling $13.99
I T Services$1.60$0.03
Marketing $0.02
Oil and Gas$57.25$11.32
Transport $0.05

Particularly striking in the sectoral distribution above is the fact that Oil and gas, which is the mainstay of the economy, accounting for more than 90% of Nigeria’s foreign exchange revenue and over 70% of its capital receipts, continues to witness significant fall in capital importation. 

In the period under review Oil and Gas attracted only $57.25 in Q1, which plunged further to $11.32, in support of deliberate action of the international financiers not to support any new hydrocarbon investment in favour of increased expansion of renewables to check climate concerns on global warming being fuelled by carbon dioxide emission largely from petroleum activities.

However, Nigeria is still yet to get on board the energy transition train, as there was no mention of it in the recently passed Petroleum Industry Bill (PIB), preferring instead to continue with exploration activities in the frontier basins and development of its gas resources.

Also, the table above confirms the MPC’s observation of improvement in the Manufacturing Purchasing Managers’ Index (PMI), which rose to 46.6 index points in July 2021, compared with 45.5 index points in June 2021. “Though it remained below the 50-index point mark, the improvement is an indication of gradual recovery of output growth in the economy,” it added.

Furthermore, the sectoral distribution in Q1 and Q2, which confirms the dominance of the financial services sector – the equities market and banks, also proves that the capacity of banks to attract foreign capital is not based on awards or recognitions but on each bank’s ability to assess risks properly. 

The NBS report reveals: “By Bank, Stanbic IBTC Bank Plc emerged at the top of capital investment in Nigeria in Q2 2021 with $310.21million. This accounted for 35.43% of the total capital inflow in Q2 2021.

Of the 27 listed commercial and merchant banks only the 18 accounted for the capital importation volume as shown in the distribution below:

Globus $1.00 
Heritage $0.05 
Nova Merchant$4.05 
Rand Merchant$96.37 
Standard Chartered $633.07$282.37

World investment climate

The United Nations Conference on Trade and Development (UNCTAD), has observed that Global flows of foreign direct investment have been severely hit by the COVID-19 pandemic. 

“In 2020, they fell by one third to $1 trillion, well below the low point reached after the global financial crisis a decade ago. Greenfield investments in industry and new infrastructure investment projects in developing countries were hit especially hard,” it said.

UN Secretary-General, António Guterres, in his foreword in the World Investment Report (WIR) released last month, said: “Increasing investment to support a sustainable and inclusive recovery from the pandemic is now a global policy priority. This entails promoting investment in infrastructure and the energy transition, in resilience and in health care.”

He added that a concerted global effort is needed to increase Sustainable Development Goals (SDGs) investment leading up to 2030.   

To this, Acting Secretary-General of UNCTAD, Isabelle Durant, reiterated that the issue now is not only about reigniting the economy, but “about making the recovery more sustainable and more resilient to future shocks,” especially for developing and emerging economies.

UNCTAD’s Director of Investment and Enterprise, James Zhan, noted that commodity dependent economies were more severely impacted by the pandemic than non-resource-based economies. 

The WIR revealed that Nigeria witnessed a slight increase in inflows to from $2.3billion in 2019 to $2.4 billion in 2020.  “One important greenfield investment ($66 million) in the non-oil economy was the construction of a manufacturing facility in the Lekki Free Trade Zone by Ariel Foods (Kenya). There was also a significant M&A deal in the same region, with China Communications Construction Company providing the initial $221 million equity injection in Lekki Deep Sea Port, out of a planned total investment of $629 million. Other transactions that contributed to FDI diversification, such as the investment by Multichoice Group (South Africa) in Betking, a provider of data hosting services, were relatively small.”

As a result, the report said the focus of both policymakers and firms is now on building back better, adding that resilience and sustainability will shape the investment priorities of firms and governments, even as developing countries account for only about 10 per cent of total recovery spending plans to date.

The report therefore prescribed a policy framework for investment in sustainable recovery saying that “Promoting investment in resilience, balancing stimulus between infrastructure and industry, and addressing the implementation challenges of recovery plans requires a coherent policy approach.”

For developing countries, the WIR urged that industrial development strategies should generate a viable pipeline of bankable projects. “The lack of shovel-ready projects in many countries remains a key barrier to attracting more international project finance. The risk now is that, in the absence of projects that have gone through the phases of design, feasibility assessment and regulatory preparation, the roll-out of recovery investment funds will incur long delays.”

The framework concludes by calling for strong governance mechanisms and contracts that anticipate risks to social and environmental standards on aggressively priced projects.

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