NBS report: Changing the narrative on capital importation
In its recently released Capital Importation Report, the National Bureau of Statistics stated that the total value of capital imported into Nigeria in the second quarter of 2017 was estimated to be $1.79bn. While this represents, on a year-on-year basis, a remarkable increase of 43.6 per cent from the $1.04bn recorded in the second quarter of 2016, it pales into insignificance when matched with peer middle income countries. For example, available data from the United Nations Conference on Trade and Development shows that Indonesia, a country with large population like Nigeria (about 260 million inhabitants as of 2016) and also blessed with abundant natural resources (oil, natural gas, timber, fish, metals) attracted Foreign Direct Investments worth $29bn in 2016, or about $7.25bn quarterly on the average. Similarly, between 2015 and 2016, India attracted over $40bn worth of foreign investments. In Malaysia, the level of foreign investment has been fluctuating between $9bn and $12bn since 2010, making the country one of the highest recipients of FDI in Asia while South Africa has remained the largest hub of FDI influx into Africa.
Back home, the uptick in capital importation in the second quarter appears consistent with noticeable improvements in many areas of the economy including the manufacturing sector, where the Purchasing Managers’ Index has been above the 50 points indicative threshold, and the stock market which has achieved positive real returns in recent times- all traceable to improved liquidity in the foreign exchange market and associated exchange rate stability. However, a close look at the capital importation trend from the first quarter of 2015 exposes the vulnerability of the economy to the vagaries of the international oil market. The level of foreign investments has tended to oscillate with crude oil price performance dropping from over $2.5bn in the first quarter of 2015 to under $1bn in the first quarter of 2016 on the back of drastic fall in crude oil price below $30 per barrel.
So, the recorded improvement in the second quarter may not be unconnected with the marginal spike in crude oil price. Little wonder, the sector that attracted the second largest value of imported capital, after share capital, was the oil and gas sector accounting for 10.6 per cent of total imported capital during the quarter. The danger here is that another severe oil price shock would negatively impact foreign investments in Nigeria. It is important to note that investments in the oil sector are capital intensive and so the multiplier effect on job opportunities is hardly significant as the oil sector, which accounts for about 10 per cent of the country’s GDP, employs less than five per cent of the labour force.
According to the NBS report, only three banks namely, Stanbic IBTC; Citi Bank Nigeria and Standard Chartered Bank accounted for over 70 per cent of total capital imported during the second quarter. Of the three foreign banks, only Stanbic IBTC is quoted on the Nigerian Stock Exchange. Not surprisingly, its share price has witnessed remarkable growth from less than N20 per share a few weeks ago to over N40 currently. The other 22 banks accounted for the balance (less than 30 per cent) of capital imported. This speaks to the fact that most Nigerian banks have yet to find their feet on the global scene. Of concern also is the disclosure that many state governments could not attract any form of new investments into their states during the period. Capital importation is still highly concentrated in Lagos (accounting for over 97 per cent of capital importation) while Akwa Ibom, Abuja and Oyo trailed far behind.
In terms of contribution, Foreign Portfolio Investment was responsible for most of the inflows into the country recording an estimated $770m with Foreign Direct Investment amounting to a mere $274m. This capital importation mix, which is largely in favour of the FPI, is not too healthy for a mono-product economy like Nigeria. The simple reason is that whereas the FDI represents real long term investments such as acquiring a manufacturing facility, the FPI, which involves investing in financial assets such as stocks or bonds, is empirically considered as fluctuating capital. Portfolio investors are like fair weather friends who would not hesitate to exit at the slightest sign of trouble. For this reason, the FPI is highly volatile, speculative and could have destabilising effect in the foreign exchange market. For an economy like Nigeria yearning for sustainable economic growth, the FDI is certainly preferred to hot money that goes by the name of FPI.
As a matter of fact, the United Kingdom, for many years, has led in terms of foreign investments in Nigeria, closely followed by the United States. This is not surprising given the country’s historical ties with the UK. But the bulk of these investments, especially lately, have been FPI. There is no gainsaying the fact that Nigeria urgently needs foreign direct investments in critical sectors such as agriculture, manufacturing, solid minerals and construction. Regrettably, the NBS report disclosed that sectors with potential for job creation such as fishing, transport and weaving recorded no capital importation in the second quarter of 2017.
Therefore, changing the narrative on capital importation in favour of the FDI in key sectors of the economy will make way for a faster growth trajectory. This would entail wooing countries that are known to be active in foreign direct investments such as China, Japan, Singapore and the Netherlands. Based on data from the Malaysian Investment Development Authority, the majority of foreign direct investments in Malaysia come from China and the Netherlands. In Indonesia, the biggest FDI inflows originate from Singapore followed by Japan, China, Hong Kong and the Netherlands while in India, the greatest FDI inflows come from Mauritius, Singapore and Japan, with the top two (Singapore and Mauritius) jointly accounting for 50 per cent of total FDI. The NBS report indicated that Belgium and Singapore accounted for only 15.7 per cent and 8.67 per cent of capital importation in the second quarter of 2017 respectively. This is a far cry from their contributions in other frontier/emerging economies.
Beyond seeking financing support for rail, roads and power infrastructure critical for FDI inflows, these countries should be attracted to invest in Nigeria by setting up manufacturing plants instead of shipping in finished products. For this task to be achieved, our foreign missions have a crucial role to play and would require increased funding to be able to implement initiatives targeted at baiting genuine foreign investors. It goes without saying that commitment to the implementation of the Economic Recovery and Growth Plan with emphasis on infrastructure provision and enhancing the ease of doing business will help change the present narrative in favour of longer-term foreign direct investments.
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