Victor EzejaThe global audit, tax, and advisory services firm, KPMG, has highlighted reasons for decline in Foreign Direct Investment and the impact on Nigeria’s economy.
The financial advisory and audit firm made this known while reacting to the recent report released by the National Bureau of statistics (NBS), which revealed a decrease of capital importation into Nigeria in the third quarter of 2023.
The NBS report indicated that the total amount of capital imported into Nigeria during the third quarter of 2023 was $654.65 million. This shows a decline of 36.45 per cent from the $1.03 billion recorded in the second quarter of 2023 and a 43.55 per cent year-on-year decline from the $1.16 billion recorded in 2022.
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Further analysis of the data showed that other investments such as loans, currency deposits, and trade credits, dominated inflows and accounted for 77.56 per cent of the total capital imported in Q3, 2023.
With an average yearly contribution of 62.18 per cent, portfolio investments had been the biggest source of capital importation for the past six years. However, in Q3, 2023, they accounted for only 13.31 per cent of capital importation.
FDI continued to be the least significant source of capital importation, accounting for 9.13 per cent of all capital importation in Q3, 2023, valued at $59.77 million, down 30.52 percent from Q2, 2023’s $86.03 million.
Exit Of Major Multinationals Erodes Investors’ Confidence
In its “Flashnotes” tagged, “Light Not Yet at the End of the Tunnel for Foreign Capital?” KPMG pointed out that the drop in capital importation into Nigeria in the third quarter was due to continuing negative market sentiments against the country, despite initial positive reforms.
It partly attributed it to the exit of some big foreign companies that have operated in the country for many years such as GSK, P&G among others, adding that the news have contributed to loss of confidence in the country’s business environment by investors.
“We attribute the drop in capital importation to Nigeria in Q3 2023, after an initial rise in Q2 2023, to continuing negative market sentiments on the country despite initial reforms being viewed positively,” KPMG stated in the note.
“The need for macroeconomic stability, the negative interest rate environment, wide FX gap with low and declining forex reserves, the need for greater clarity with respect to monetary and fiscal direction in addition to various negative news including the exit of multinational companies like GlaxoSmithKline and Procter & Gambles (P&G) who have discontinued on-ground operations and adopted import and distributor-led business models as well as recent reclassifications of Nigeria from frontier markets to standalone and lower markets by two external investment bodies – FTSE Russell and MSCI, respectively, have all dampened external sentiments,” it added.
The report clarified that given their transient nature, it was concerning that trade credit, loans, and other associated kinds of capital inflows increasingly disproportionately dominated capital importation.
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The firm further noted that the decline of portfolio investment since Q1, 2023, from $649.28 million to $87.11 million in Q3 2023, was exposing the economy to risks of foreign exchange illiquidity and currency depreciation.
It said: “Portfolio investment which includes investments in financial assets such as stocks, bonds, and other securities has also been on the decline since Q1 2023 from $649.28 million to $87.11 million in Q3 2023 exposing the economy to risks of foreign exchange illiquidity and currency depreciation, pressure on consumer price inflation, reduced purchasing power, slower economic growth (3.75% target for 2024), lower job creation (especially from persistent reduction in (FDI), and overall macroeconomic instability.
“It also makes the economy more vulnerable to global economic shocks which is especially concerning given the current global poly-crisis.”
The observed that Nigeria needs to invest not less than $14.2 billion annually to or 12 percent of its GDP for the next 10 years to address the its “Huge infrastructure gap estimated at 40 per cent of GDP.”
It stated: “Despite the well-recognised potential of the Nigerian environment, investors are, nevertheless, reluctant to invest or remain in a country where they anticipate challenges related to infrastructure, logistics, connectivity, and operational efficiency.
“Investors seek stability and predictability in the business environment, and the lack thereof hampers capital inflows.”
“Therefore, there is an urgent need to reverse this trend and restore investors’ confidence in the Nigerian economy by intensifying ongoing efforts to create a stable and enabling macroeconomic environment.”
The financial advisory and audit firm called on the Nigerian government and relevant stakeholders to make concerted efforts in restoring investors’ confidence in the Nigerian economy.
This, the firm said calls for “implementing consistent and investor-friendly policies, improving infrastructure, strengthening the competitiveness of macroeconomic fundamentals, and eliminating structural and regulatory bottlenecks impeding the inflow and outflow of capital.”
It however stated that the decrease in foreign inflow might help Nigeria become more self-sufficient by lowering its dependency on outside funding and fostering the growth of its own resources.
It added that development might encourage local entrepreneurship and lead to the investigation of other funding options, including domestic savings and capital markets.
“It is nevertheless important for Nigeria to strike a balance between attracting foreign capital and promoting domestic development through policies that encourage foreign investment while also fostering a conducive environment for local businesses to thrive,” KPMG stated.
Victor Ezeja is a passionate journalist with six years of experience writing on economy, politics and energy. He holds a Masters degree in Mass Communication.
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