Nigeria’s diversified, resource-rich economy is luring investors. But in the absence of major reforms and an economic development program, direct and portfolio investment are moving in the opposite direction.
Nigeria’s population of over 227 million makes it Africa’s largest market. But to attract and retain the investment needed to realize its potential, observers say the country must cope with a perilous situation that includes macroeconomic imbalances, a difficult business environment and banditry that threatens both agricultural and industrial production.
“When the government manages to address insecurity, that will be part of the attraction for investors because the market is still here in Nigeria,” says Marcel Okeke, former chief economist at Zenith Bank, the country’s largest lender. by market capitalization.
Some important changes are already happening. At his inauguration in May last year, President Bola Tinubu announced the removal of petrol subsidies. In June, the Central Bank of Nigeria floated the naira to eliminate multiple exchange rates. Together, the changes triggered a price spiral, pushing headline inflation to 29.9% in January, the highest level in 29 years.
The naira depreciated in both the official and parallel markets, falling to an all-time low of N1,551.24 per dollar as of February 20 in Nigeria’s official autonomous foreign exchange market, lower than N1,488 in the parallel market on the same day. The corresponding rates in these markets in June last year were N462 and N750 per dollar respectively.
Placing the currency “was like throwing the naira into a boxing ring along with the dollar, pound sterling, euro and other hard currencies,” Okeke says. “Within minutes, the naira was knocked down.” So, he adds, the new strategy must answer questions about how to increase the dollar supply and increase foreign exchange inflows.
The government says both measures are already producing positive results. “We are saving money by eliminating fuel subsidies; we are saving money by liberalizing the naira against the dollar,” says Tope Fasua, Special Adviser to the President on Economic Affairs in the Office of the Vice President. “For every dollar bill that comes into the country, we get a lot more naira.”
In addition, the central bank proposed bank recapitalization so that banks can help support the President’s stated goal of raising Nigeria’s GDP to $1 trillion by 2033. Bank recapitalization is necessary because the devaluation of the naira has reduced the global competitiveness of local banks, Okeke says. speaks. Pabina Yinkere, head of asset management at Norrenberger, an integrated financial services group in Abuja, notes that since the central bank last set a minimum capital base, the largest category of commercial banks with international operations are those with 50 billion naira or more in assets – the Nigerian banking sector showed almost 50%: growth, which is further supported by the weakening currency.
But recapitalization alone will not transform the economy, says Damilar Asimiyu, a macroeconomic strategist who heads research group Afrinvest Consulting in Lagos. “Even if banks increase their capital base, inefficiencies in other sectors could neutralize profits,” he argues. “This is because the operating environment in the real sector must be conducive and the opportunities within it must be bankable and with manageable risks.”
Conflicts, security and internal risks
In January, the International Monetary Fund predicted Nigeria’s economy would grow 3% this year. However, Nigeria faces slowing economic growth, poverty and food insecurity, stalled per capita growth and income difficulties, the IMF has warned. Actual nominal GDP per capita is estimated to decline over the current three-year period, from US$2,202 in 2022 to approximately US$1,669 in 2023 and a projected US$1,219 in 2024. Nigeria has emerged quickly from the Covid-19 recession, “but growth constrained by the hydrocarbon economy is barely keeping pace with population dynamics,” the IMF warns.
However, IMF analysts add: “If the authorities manage to develop and implement a comprehensive reform program, the medium-term prospects will improve significantly.” High inflation, including food prices, reflects the removal of fuel subsidies, exchange rate depreciation and poor agricultural production. Nigeria is currently facing a food crisis which has led to protests.
Nigeria’s diversified economy, coupled with its wealth of untapped natural resources, continues to make the country an attractive investment opportunity, says Yinkere. The government is now inviting investors into its mining sector, which boasts deposits of gold, bauxite, bitumen, lead and zinc, among others.
“Many industries are in their infancy, which suggests there is room for significant growth,” he says. “Nigeria’s per capita consumption of so many goods highlights the enormous investment potential.”
But harnessing this wealth remains a challenge. The main problems are physical insecurity in the form of banditry and kidnapping for ransom. Since the government’s war against the jihadist Boko Haram insurgency began in earnest in the northeast in 2009, violence has spread to all parts of the country. Armed bandits operate on highways, villages and farmland, holding victims for ransom or killing them.
“This innovation poses a real threat to the agricultural sector, for example,” says Okeke, noting that it has contributed to rising food prices in Nigeria.
The theft of crude oil, the country’s main export, is helping to reduce foreign exchange earnings. The IMF projects foreign exchange reserves to fall to $23.8 billion this year from $36.6 billion in 2022. Yinkere argues that to attract foreign capital, the government must “deliberately embark on reforms that will open up opportunities in the sector and position the economy as an investment haven for both foreign direct investment and foreign portfolio investment.”
Containing investment outflows
However, some foreign companies have left Nigeria in the past year, with close observers blaming the harsh business environment.
Among the major outliers was GlaxoSmithKline Consumer Indonesia (GSK), the country’s second-largest pharmaceutical company, which ceased operations in August, 51 years after it began operations in the country, due to currency-related issues and high operating costs. Procter & Gamble suspended domestic production in favor of imports, blaming macroeconomic issues for its decision.
Another loss was the French pharmaceutical company Sanofi, which ceased domestic production and appointed a representative to distribute its drugs in Nigeria. In the oil and gas industry, Shell announced in January a deal to sell its onshore Niger Delta business to a consortium of companies valued at $2.4 billion.
These lost investments are attributed to “exchange rate volatility and runaway inflation”, says Afrinvest’s Asimiyu, while economist Okeke blames a “suffocating” business environment. “They are suffocated,” he says, “so they come up with all sorts of excuses for us.”
The reasons for the troop withdrawal are more complex, argues presidential adviser Fasua. “A lot of companies are leaving because of their strategies,” he says, citing GSK’s exit from Kenya just four months after leaving Nigeria.
According to him, instead of viewing the exit of companies as a problem, Nigerians should view this development as an opportunity.
“By now, many of our pharmaceutical companies should be able to step up their activities,” says Fasua, “and I see this as an opportunity for many companies that want to get into this business. Why are we distorting the narrative that the economy is dying?”
While he agrees that some of these exits were strategic decisions, Yinkere insists that Nigeria’s challenging operating environment precipitated some of them. To stem the outflow, he wants the government to focus on macroeconomic stability and creating a friendlier business environment. “To boost investor confidence, high inflation and exchange rate issues need to be addressed,” he says.
Yinkere expects the central bank to maintain tighter monetary policy, at least in the first half of the year, in the face of high inflation and currency problems. This is in line with the position of the IMF, which sees “a continuation of raising the monetary policy rate until it becomes positive in real terms.” [as] an important signal of the direction of monetary policy.” Nigeria’s monetary policy rate stood at 18.75% in January and rose to 22.75% at the end of February.
Fasua counters that Nigeria has “abused its monetary policy.” Policymakers should be careful about how much they raise interest rates, as this could slow the economy and precipitate a recession. “We don’t want to go there.” says Fasua. “We need growth.”
On the fiscal side, the government created the President’s Committee on Fiscal Policy and Tax Reforms to make proposals to increase domestic revenues to support investments in infrastructure, health and education. It is hoped that the committee will come up with practical proposals to increase revenue in 2024 and beyond.