Oguche Agudah, Chief Investment officer, Natanel Florens

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Subjects of Interest

  • Development Finance
  • Finance and Investment
  • Fiscal Policy
  • International Trade

A different approach to drive FDIs into Nigeria 09 Feb 2017

It is safe to say these are not the best of times for Nigeria economically. Indeed, the currencies, reserves and fiscal operatives of many emerging and frontier markets, in particular the commodity exporters, have been hit by the slump in commodity prices. Dollar liquidity is in short supply and many of these economies are looking for innovative ways to encourage much-needed dollar inflows and boost revenues.
    
One sure way to attract foreign currency into economies is foreign direct investments (FDIs). These investments are not short-term, unlike foreign portfolio investments; they produce long-term benefits for the recipient economy and facilitate knowledge transfer.    

Over the past decade, Africa attracted significant amounts of FDIs as multinationals jostled to tap into the growing middle class, the youth bulge, the relative political stability on the continent, and growth in African economies. According to the World Bank, the quantum of FDI flows into Africa jumped five times from the year 2000 to $60 billion in 2014. Nigeria was the major recipient of this boom, reaching a high of $9 billion in 2011. The country’s FDI figure for 2015 shows a drastic drop to $3 billion. The reasons for the drop are not farfetched. As one would expect, the levels of investments have declined in the last couple of years, due to growing uncertainty and the unwinding of monetary stimulus in the United States. As one investor put it, “I can live with risk that can be managed, but I can’t live with uncertainty.”

That uncertainty is what is widely believed to be the greatest challenge to attracting much-needed foreign investments into Nigeria at this time, especially given the challenge with the exchange rate management system. The permanent solution to this problem is the structural reconstruction and reform of the Nigerian economy. As long as proceeds from crude oil account for more than 90% of Nigeria’s foreign exchange earnings, then the amount of dollar liquidity available to it will always be susceptible to shifts in international prices of this commodity.

The irony, however, is that some of the structural reforms needed to wean the country off the dependence on crude oil receipts would still require investments and capital from offshore sources – and a stable exchange rate is needed to facilitate all these.

The challenge with structural reform has always been policy consistency and harmonisation. Economically, Nigeria needs to be moving in one direction. Once the country decides what its economic focus is, all the stakeholders must rally behind that focus to achieve the nation’s economic targets. These targets must be embedded in the psyche of all regulatory agencies, ministries, departments and agencies (MDA), and the private sector, with the multilateral agencies adequately briefed.

The policies pursued in this regard (while trying to build a resilient economy that is more diversified in its sources of foreign exchange earnings) should also not alienate foreign institutional and individual investors who are the sources of capital and FDIs.

But whilst there are long-term structural reforms that need to be embarked upon, there are many policy and operational strategies that can be adopted in the immediate term to increase the level of FDI flows into the country.

1.    Set up Nigerian embassies as sales outlets: Currently, Nigeria has diplomatic missions in more than 100 countries spread across the globe. These diplomatic missions must expand their functions from diplomatic outposts to also becoming sales and investment sourcing centres. There should be at least one knowledgeable Nigerian in those embassies that is abreast of the Nigerian investment climate and can make presentations to investors to facilitate investments into the desired sectors. In addition to having qualified Nigerian professionals at the diplomatic outposts, it would also be useful to employ local professionals in those countries who understand the local business environment and can speak directly to local businesses looking to expand. The cost of these additional staff would be more than offset by the level of investments that they would attract.

2.    Targeted company engagement: There are some items that typically top the list of imported items into Nigeria. A number of these items can and should be manufactured in Nigeria. Efforts should be made to target these items, and their offshore manufacturers. Nigeria should offer incentives to these manufacturers to locate their factories and production centres in the country. Such a strategy should be approached with a timeframe within which if the manufacturers don’t commit to production in the country, then tariffs and punitive measures would be slapped on them. A case in point is the U.S. government’s recent handling of Toyota, Mercedes, GM and other manufacturers. The market in Nigeria is huge. Companies, for fear of losing out on the large domestic market, will be cooperative. But the investment case and the consequences must first be sold to them.

3.    Industry initiatives: Tied to the point above is the need to put in place industry initiatives and policies that would attract not just individual companies but also industries as a whole. Each industry has its nuance or issues it wants addressed. It could be anything ranging from closeness to the port, skilled labour, environmental issues, etc. But the authorities must be willing to look at these issues with a view to addressing them and wooing industry groups to set up their production base in the country.

4.    Licensing private investment sourcing firms: Once there’s value to be created and a profit to be made, then it’s best to farm activities to the private sector to ensure efficiency in delivery. The issue has always been that of abuse of process. However, if there are clear guidelines and constant monitoring, then they become a useful tool in achieving set objectives. The role of these firms is to sell Nigeria to individual investors, help them settle in the country, and act as liaison between those companies and the government. The companies pay them a facilitation fee, and they cede some to the government in return for being a licenced facilitator.

5.    Encourage listing on the local stock Exchange: These entities that invest in the country should be encouraged to list on the local stock exchange within a particular timeframe. This should be embedded in the investment process. Whilst the decision to list is voluntary, there should be appropriate sweeteners that make it beneficial to these foreign companies. An added advantage is that it helps them connect better with their host communities, and it helps to channel more offshore interest in the local exchange, further increasing dollar flows to the country.
    
All these items must be underpinned by an effective investment policy. The investment policy should be updated to reflect the changing realities, and with the mindset to encourage the sort of investments that will progressively reduce Nigeria’s dependence on imported items. The investment policy should be linked with the trade and industrial policy so that there is a strong focus when it comes to driving foreign direct investments. The policy should be to attract companies and industries that will complement Nigeria’s industrial and economic goals.
    
After the policy is well defined, then the strategies to execute the policy need to be designed. This will entail detailing the amount of funds required; who will manage the various local and international outposts; how often and what structure will international investment summits take; and how the investment efforts will be coordinated.

The policy and strategies can only be executed with an effective structure in place. The current investment facilitation structure is underpinned by an agency of government – the Nigerian Investment Promotion Council (NIPC). This structure should be complemented by Nigeria’s embassies, the professional facilitators (banks, lawyers, etc) and specialized foreign and local investment facilitation firms.

After all is said and done, investors are principally looking at the return on their investments. They will gravitate towards any country that offers them the opportunity to make decent risk-adjusted returns. Nigeria has been offering that for a number of years. However, as the world economy continues its uncertain ride, Nigeria has to look for incentives and also tweak its policies and strategies to support the aspirations of foreign investors and meet the long-term needs of the Nigerian economy.