For some years, the country has been experiencing a setback in capital importation owing to uncertainty of investors’ response to the country’s macro-economic development. Within two decades of its latest democratic dispensation, Nigeria’s Gross Domestic Product (GDP) growth rate has varied from substantial to marginal to recessive.
Trend of Capital Importation since 1999.
According to the National Bureau of Statistics, capital importation was estimated at $9.6 billion in 2007 and $11.2 billion in 2008; then in 2009, it rose to $5.7 billion after the global economic crisis. Recovering in 2012, it peaked in 2013 to $21.3 billion (the highest it has ever been in Nigeria). In 2014 (close to the general election of 2015), capital importation dropped to $20.75 billion, then to $9.6 billion afterwards and to $5.12 billion in 2016 owing to the elections and the economic recession that hit the country same year. In 2018, it grew to $16.81 billion. According to the NBS figures, capital importation was at its lowest in 2016 owing to the various economic challenges the country experienced that year.
“The weakening of the naira may have had an impact. A weaker naira means more can be purchased with each dollar, and therefore investment projects requiring naira payments cost less in dollar terms. Portfolio investment fell the most, by 69.81 percent. This investment type, whereby investors seek quick returns rather than control of management in companies they invested, is most likely to be affected by current market conditions,” the bureau stated.
Meanwhile, the country’s GDP has experienced steady growth in its 20 years of democracy, starting from N1.19 trillion in 1999 to N95.51 trillion in 2014 owing to the devaluation of the naira/dollar exchange rate. The exchange rate has depreciated continuously, from N21.89/dollar in 1999 to N360.01/dollar in 2019.
Economic Explanation of Capital Importation.
Professor. Uche Uwaleke, Chief Economist of the Securities and Exchange Commission (SEC), also a professor of Capital Markets, gave a speech regarding the capital importation trend. He said the trend is a representation of the fluctuations in investors’ confidence in the economy resulting from the price of crude oil being the country’s major source of income. Capital importation decreased in 2015 and 2016 due to economic downturn resulting from the fall in the price of crude oil around the world.
“A second reason that explains the trend is the fact that capital importation into Nigeria, which has come mainly from the UK and the USA, has been more of the volatile portfolio type that is short term in nature with foreign investors fleeing at the slightest sign of shock only to return after conditions normalize. By the same token, over the years, the trend in GDP growth (discounted for inflation) is also tied to oil sector performance as GDP size has always been influenced by crude oil output in particular, which usually drops with rising cases of shut-ins and oil facilities vandalism in the Niger Delta region,” Prof. Uche Uwaleke stated.
He recollected that the abrupt crash of oil price alongside decreased crude oil output resulted in the five quarters of deflation of the GDP growth the country just experienced, as the 2014 re-basing exercise introduced new sectors that were not part of the GDP figures.
The Proposed Solution?
The government should also look to address the high rate of insecurity in the country and ensure investments are safe. Prof. Uwaleke said that a comfortable business location is important to interest, not only foreign portfolio investments, but also the much sought after foreign direct investments which are more employability focused. He noted that this would rub off positively on GDP growth.
“Provision of adequate infrastructure especially power, roads and rail, as well as a focus on other employment elastic sectors of the economy such as ICT including agriculture, education and health should be the direction in the next 10 years. The good news is that the economy has achieved some degree of macroeconomic stability as well as remarkable improvements in the ease of doing business, while infrastructure and agriculture in particular are receiving attention,” Prof. Uwaleke stated.
The professor encouraged the government to keep investing in vital sectors of the economy like ICT, agriculture, education and health, he urged them not to overlook the potentials of the capital market.
More on Solutions
“Capital importation and GDP figures are products of the economic policies of the government. Given the right policies, investors will be willing to inject financial/economic resources into the Nigerian economy or any other economy for that matter, which in turn contributes to economic growth rate. To achieve sustainable economic growth rate and improved foreign direct investments, the government must maintain a stable macro-economic policy environment by ensuring market driven but stable exchange rate and low inflation rate. There is needed for the government to create incentives to attract investments to specific sectors of the economy, particularly the sectors where Nigeria has comparative advantage,” Mr. Johnson Chukwu, M.D/CEO of Cowry Asset Management stated.
He added that the government should also endeavor to grow the nation’s ranking on the Ease of Doing Business and Global Competitive Index. He said other factors that would draw foreign direct investment and encourage economic growth would include an enhancement in the country’s security and an improvement in basic infrastructure like power supply and transportation.