Nigeria is one of the top three economies attracting FDI to the African continent. Today, it is behind Ethiopia and Egypt.
The country is regarded as a promising pole of growth, which prompts numerous investors to support the economy. In particular, oil and gas, energy, and construction are appealing to the international investor audience.
Reasons for Concern
As an oil exporter, Nigeria has been hit hard by the consequences of the pandemic. However, even before 2020, it was grappling with the effects of the oil countershock.
As per the UNCTAD 2020 World Investment Report, the country received $3.3 billion in foreign direct investment in 2019.
The flow almost halved in comparison with 2018, when it stood at $6.4 billion. The downtrend reflected the effects of austerity measures.
However, the government has been taking steps to diversify its sources of revenue and boost the country’s appeal to foreign investors.
In 2019, the country received $98.6 billion in FDI stock. Predominantly, support came from the United States, the United Kingdom, China, France, and the Netherlands.
The country has also seen a rise in Greenfield Investments — from 57 to 76 projects since 2018. The value of these Investments increased from roughly $8 billion to over $10 billion.
Diversification Efforts So Far
Nigeria is overly dependent on its oil reserves, which means that every decrease in oil prices directly affects its economy. The government realises the inadequacy of the system and aims to diversify it.
It is possible through the creation of a competitive manufacturing sector, which will improve efficiency and enable the integration of the local economy into global value chains.
The recently established Federal Ministry of Industry, Trade, and Investment reflects the focus on merging of the three domains. Their effective coordination will contribute to the improvement of the overall environment for trading and investment.
Nigeria attracts foreign investors because of its significant fossil fuel reserves, low labour costs, favourable taxation system, and partially privatised economy.
However, there are still multiple challenges hampering FDI growth. Instability of the political system, corruption, and lack of infrastructure limit the potential. The local system is also highly bureaucratic, which hurts the country’s image.
The World Bank’s 2020 edition of Doing Business Report offers important insights into local FDI. Doing business in Nigeria is fairly complicated — in terms of ease, it ranks just 131st globally. Still, this reflects improvement since the previous year, as the 2019 edition only placed the country in the 146th position.
Main Improvements So Far
In recent years, Nigeria has seen considerable improvement in several ranking subcategories. These concern launching of businesses, construction permits, provision of electricity, property registration, contract enforcement, and trading across borders.
This was the second time the country became one of the top 10 performers. It has been receiving investment flows from large US-based companies like Facebook and Uber. Emergent Payments and Meltwater Group have also been involved. China was the second-biggest investor. Its primary interest is in textiles, vehicles, and aerospace.
New opportunities for local residents have emerged. The country comes second after South Africa in terms of Forex trading.
Local residents are increasingly involved in fx trading in Nigeria and other countries. They buy and sell currencies online in global foreign exchange. And the presence of global brokers like Forextime stimulates this growth.
Key Strengths of Nigeria As FDI Location
Here is why the country is attractive to foreign investors today. Aside from being the most populous on the continent, it boasts of:
- vast domestic market;
- the highest GDP in Africa;
- substantial fossil fuel reserves;
- considerable agricultural potential;
- relatively modest debt, both public and external;
- a far-reaching economic liberalisation policy, including the government’s promotion of public-private partnerships and strategic alliances with companies abroad.
Key Weaknesses of Nigeria As FDI Location
The country has important obstacles preventing further growth of FDI. In 2021, these include the following.
- Inadequate development of energy and transport infrastructure, which increases operating costs.
- Inadequacies of the local judicial system, which creates obstacles for dispute settlement.
- Economic vulnerability to market volatility as a result of dependence on oil and gas exports (hydrocarbons account for over 90% of export revenue).
- Profound divisions within the country (religious, ethnic, and regional) reflected in the behaviour of tribal and state authorities. This threatens political stability and hampers progress on the federal level.
- Lack of security, particularly due to the activity of the Boko Haram extremist group.
Nigeria as FDI Location
Although Nigeria has made considerable progress over the past years, there are still many obstacles to FDI growth. Dependence on oil exports is the strongest deterrent. Until the country improves infrastructure, makes the legal system more efficient, and remedies ideological divisions, the growth of FDI will be limited.