BREAKING: Foreign Direct Investment Into Nigeria Falls To Record Low of $29.8m

Foreign Direct Investment into Nigeria has fallen to a record low of $29.8m.

NaijaOnPoint Nigeria reports that the Foreign Direct Investment (FDI) into Nigeria in the second quarter of 2024 dropped to $29.83m, marking the lowest level ever recorded based on available data up to 2013,

According to The PUNCH’s findings, data from the latest capital importation report by the National Bureau of Statistics shows that FDI dropped by 65.33 percent compared to the $86.03m recorded in the same period last year.

It also dropped by 74.97 per cent from the $119.18m reported in the preceding quarter of 2024.

Economists who spoke with The PUNCH on Tuesday blamed the significant drop in FDI on naira devaluation and unstable foreign exchange market, as the naira lost about 40 per cent of its value in the first six months of 2024.

Data from the NBS shows that Nigeria’s FDI includes equity and other capital. Most of the FDI in Q2 2024 came from equity investment, amounting to $29.82m.

This represents a sharp decrease of 74.98 per cent compared to $119.17m in Q1 2024. On a year-on-year basis, equity investment declined by 65.33 per cent from $86.02m in Q2 2023.

The other component of FDI, classified as “Other Capital,” recorded a minimal inflow of $0.0085m in Q2 2024, which is down by 33.33 per cent from $0.01275m in both Q1 2024 and Q2 2023.

Although this category traditionally accounts for a very small fraction of FDI, the decline indicates a further reduction in this already limited source of capital.

Despite the claim by President Bola Tinubu that his administration has successfully drawn $30bn in FDI commitments, the decline in FDI highlights the challenges Nigeria faces in attracting long-term investment amid a challenging global economic environment and domestic issues.

The PUNCH further observed that FDI made up only about 1.15 per cent of the total capital importation of $2.60bn in the quarter under review.

Also, foreign currency loans, which include portfolio investments and direct loans, contributed $2.55bn, representing 98.08 per cent of the total inflows.

This preference for loans over equity investments reflects investor caution, with foreign investors opting for safer financial instruments rather than committing to long-term projects.

The reliance on foreign currency loans highlights the ongoing trend where short-term investments and debt instruments dominate Nigeria’s capital importation landscape.

While these inflows can provide immediate liquidity to the economy, they do not offer the same level of stability or growth potential as direct investments into physical assets or infrastructure.

Also, The PUNCH observed that in Q2 2024, Nigeria experienced a significant decrease in both portfolio investments and foreign currency loans.

Portfolio investments for Q2 2024 stood at $1.40bn, marking a sharp decline of 74.97 per cent from $5.60bn recorded in the preceding quarter, and a 65.33 per cent drop compared to the $4.05bn reported in Q2 2023.

Similarly, foreign loans, which constitute a substantial portion of Nigeria’s capital importation, recorded an inflow of $1.15bn in Q2 2024, reflecting a 74.98 per cent decrease from $4.60bn in Q1 2024.

When compared to the same period in the previous year, where loans amounted to $3.32bn in Q2 2023, the decline was 65.33 per cent.

The PUNCH further observed that Nigeria’s capital importation of $2.60bn represented an increase of 152.81 per cent year-on-year compared to $1.03bn in Q2 2023.

Despite this annual growth, the figure marks a decline of 22.85 per cent from the $3.38bn recorded in the first quarter of 2024.

The decrease in quarterly figures highlights ongoing fluctuations in investor sentiment, reflecting global economic uncertainties and domestic challenges.

The report read. “In Q2 2024, total capital importation into Nigeria stood at $2,604.50m, higher than $1,030.21m recorded in Q2 2023, indicating an increase of 152.81 per cent. In comparison to the preceding quarter, capital importation declined by 22.85 per cent from $3,376.01m in Q1 2024.”

Portfolio investments emerged as the primary driver of the capital inflows, contributing $1.40bn, or 53.93 per cent of the total.

These investments often involve foreign investors injecting capital into Nigeria’s stocks, bonds, and other financial instruments, aiming for quick returns.

Meanwhile, other investments, which include loans and trade credits, followed with $1.17bn, accounting for 44.92 per cent of the total inflows.

The banking sector was the largest beneficiary of capital importation, receiving $1.12bn, representing 43.15 per cent of total inflows in the quarter.

This sector’s dominance highlights the crucial role of banks as conduits for foreign investments, facilitating access to Nigeria’s financial markets.

Following the banking sector, the production/manufacturing sector attracted $624.71m, which constituted 23.99 per cent of the total.

This influx into production and manufacturing suggests a positive outlook for industrial activities, potentially signalling a gradual recovery in Nigeria’s manufacturing capacity.

The trading sector also saw significant capital inflows, amounting to $569.22m (21.86 per cent), reflecting the resilience of trade activities in the country.

States’ foreign capital

The PUNCH observed that only Lagos, Ekiti, and Abuja recorded inflows of foreign capital in the second quarter of 2024.

On a geographic basis, Lagos State maintained its position as the leading destination for capital importation, attracting $1.37bn, or 52.52 per cent of total inflows.

Lagos remains the commercial hub of Nigeria, offering a strategic entry point for foreign investors due to its robust infrastructure and dynamic business environment.

Abuja (FCT) followed closely, receiving $1.24bn, which accounted for 47.48 per cent of the total.

In contrast, Ekiti State recorded minimal capital inflows, with just $0.0003m during the quarter, indicating the concentration of investment in more established economic centres.

The report also highlighted the sources of these capital inflows. The United Kingdom emerged as the largest contributor, with investments totalling $1.12bn (43.01 per cent) of the overall capital importation, reinforcing its position as a key partner in Nigeria’s financial landscape.

The Netherlands was the second-largest contributor with $577.82m (22.19 per cent), while the Republic of South Africa ranked third with $255.98m (9.83 per cent).

Among banks, Citibank Nigeria Limited led the charge, receiving $818.46m, equivalent to 31.43 per cent of total inflows.

Standard Chartered Bank Nigeria Limited followed with $654.79m (25.14 per cent), while Rand Merchant Bank Plc garnered $488.59m (18.76 per cent).

Speaking with The PUNCH on Tuesday, a development economist, Dr Aliyu Ilias, said that Nigeria’s volatile foreign exchange market is a major deterrent to attracting foreign investment.

He explained that potential investors are often discouraged by the uncertainty in the FX market, which makes Nigeria a risky option for investment.

Ilias also pointed to the high cost of doing business, driven in part by the elevated Monetary Policy Rate.

He said, “I think our forex is a serious problem because whoever wants to invest in a country will look at the volatility of the forex market. Another thing is the cost of running a business in Nigeria. It is very high, especially with the MPR.

“If you look at all these issues together, it is even difficult for a Nigerian to invest in Nigeria; let alone a foreign person.”

He noted that the instability in the FX market has led to the exit of several multinationals, urging the government to focus on stabilising the market.

He warned that while controlling inflation is important, it should not come at the expense of growth, advocating for a more balanced MPR.

Also speaking with The PUNCH, Dr Muda Yusuf, an economist and Chief Executive Officer of the Centre for the Promotion of Private Enterprise, identified the tough macroeconomic climate as a key reason behind the decline in FDI.

He highlighted the adverse impact of Nigeria’s FX challenges on the investment environment, stressing that the weakened naira makes it harder for foreign firms to repatriate profits.

“The macroeconomic environment, particularly the FX situation, is not favourable for FDI,” he said, adding that this has led to the departure of many multinationals, further reducing investment inflows.

Yusuf noted that beyond the FX issues, structural challenges like energy deficits and logistical hurdles continue to weigh heavily on investor confidence.

He advised the government to prioritise strengthening the naira to attract investment into productive sectors.

Professor Sheriffdeen Tella, a professor of Economics at Olabisi Onabanjo University, Ogun State, also attributed the FDI slump partly to the naira’s depreciation, saying, “the fall in naira is one of the reasons for the drop in FDI.”

He added that high interest rates have weakened the purchasing power of Nigerians, thereby reducing demand for goods and diminishing the profitability of businesses.

Tella also noted that when domestic producers struggle, it sends a bad signal to potential foreign investors, referencing the challenges faced by companies like Dangote Refinery.

Tella argued that resolving the FX crisis, expanding the economy, and creating a more business-friendly climate are crucial for boosting Nigeria’s FDI.