Nigeria: Treacherous Terrain

Nigeria’s diversified, resource-rich economy beckons investors. But in the absence of major reforms and an economic development agenda, direct and portfolio investment are moving in the opposite direction.

Nigeria’s population of over 227 million makes it Africa’s biggest market. However, to attract and retain the investment needed to realize its potential, close observers say the country must tackle a treacherous landscape that includes macroeconomic imbalances, a difficult business environment and banditry that threatens both agricultural and industrial production.

“When the government succeeds in handling the problem of insecurity, it will be part of the attraction for investors to come in, because the market is still here in Nigeria,” says Marcel Okeke, former chief economist at Zenith Bank, the nation’s largest lender by market capitalization.

 Some important changes are already underway. At his inauguration last May, President Bola Tinubu announced the removal of subsidies on gasoline. In June, the Central Bank of Nigeria followed with the flotation of the naira, aiming to eliminate multiple exchange rates. Together, the changes triggered a price spiral, pushing headline inflation to 29.9% in January, the highest in 29 years.

The naira depreciated on both official and parallel markets, falling to an all-time low of 1,551.24 naria to the dollar oas of February 20 on the official Nigerian Autonomous Foreign Exchange Market, lower than N1,488 on the parallel market the same day. Corresponding rates on these markets last June were N462 and N750 to the dollar, respectively.

The currency flotation “was just like throwing the naira into a boxing ring alongside the dollar, the pound sterling, the euro, and such other hard currencies,” says Okeke. “Within a few minutes, the naira was knocked down.” Thus, he adds, a new strategy must answer the questions of how to increase the dollar supply and to increase foreign exchange inflow.

The government argues that the two measures are already yielding positive results.  “We are saving money on fuel subsidy removal; we are saving money on naira liberalization against the dollar,” says Tope Fasua, special adviser to the president on economic affairs, in the Office of the Vice President. “For every receipt coming into the country in dollars, we are getting a lot more naira.”

Additionally, the central bank has proposed a bank recapitalization exercise, so that banks can help support the president’s announced goal of raising Nigeria’s GDP to $1 trillion by 2033. Recapitalizing the banks is imperative because the naira’s devaluation has reduced local banks’ global competitiveness, Okeke says. Pabina Yinkere, business head of asset management at Norrenberger, an Abuja-based integrated financial services group, notes that, since the last time the central bank set a minimum capital base, the largest category of commercial banks with international operations—those with N50 billion or more in assets—the Nigerian banking industry has shown nearly 50%: growth that is further buoyed by a weakening currency. 

But recapitalization in isolation will not transform the economy, says Damilare Asimiyu, macroeconomic strategist who is  head of research at Lagos-based Afrinvest Consulting. “Even if the banks raise the capital base, inefficiencies in the other sectors could neutralize the gain,” he argues. “This is because the operating environment in the real sector must be conducive and opportunities therein must be bankable with manageable risks.”

Conflict, Security, and Domestic Risks

In January, the International Monetary Fund projected Nigeria’s economy would grow 3% this year. However, the IMF cautioned, Nigeria faces a growth slowdown, poverty and food insecurity, stalled per-capita growth, and difficulties raising revenue. It sees actual nominal GDP per capita on a downward slope over the current three-year period, dropping from $2,202 in 2022 to an estimated $1,669 in 2023 to a projected $1,219 in 2024. Nigeria exited the Covid-19 recession quickly, “ but growth, held back by the hydrocarbon economy, is barely keeping up with population dynamics,” the IMF warns.

Still, the IMF analysts add, “If the authorities succeed in developing and implementing a comprehensive reform agenda, the medium-term outlook would be much improved.” High inflation, including food prices, reflects the removal of the fuel subsidy, exchange rate depreciation, and poor agricultural production. Nigeria currently faces a food crisis that has led to protests.

Nigeria’s diversified economy, together with a wealth of untapped natural resources, continues to make the country an attractive investment opportunity, says Yinkere. The government currently invites investors into its mining sector, boasting of deposits of gold, bauxite, bitumen, lead, and zinc, among others.

“Many sectors are in their infancy, suggesting that there is room for much growth,” he says. “Nigeria’s per-capita consumption on so many items underscores the huge investment potential.”

But tapping that wealth remains a challenge. The headline issues is physical insecurity in the form of banditry and kidnapping for ransom. Since the government’s war with the Boko Haram jihadist insurgency began in earnest in 2009 in the northeast, violence has spread to all parts of the country. Armed bandits operate on highways and in villages and farmlands, holding victims for ransom payments or killing them.

“That new constituates an existential threat to the agricultural sector, for example,” says Okeke, noting that it has contributed to the rise in food prices in Nigeria.

Theft of crude oil, the country’s major export, is contributing to a dwindling of foreign exchange earnings. The IMF forecasts a drop in foreign reserves to $23.8 billion this year from $36.6 billion in 2022. Yinkere contends that to attract foreign capital, the government must “intentionally embark on reforms that will open up sector opportunities and position the economy as an investment haven for both foreign direct investment and foreign portfolio investment.”

Stemming The Investment Outflow

Yet some foreign companies have left Nigeria in the past year, a development that close observers blame on a harsh business environment.

Among the major departures was GlaxoSmithKline Consumer Nigeria (GSK), the second-biggest pharmaceutical company in the country, which exited in August, 51 years after it began operating in the country, due to foreign exchange-related challenges and high operating costs. Procter & Gamble suspended its in-country manufacturing in favor of importation, blaming macroeconomic challenges for its decision.

Another loss was Sanofi, the French pharmaceutical company, which ended in-country manufacturing and appointed a representative to distribute its drugs in Nigeria. In the oil and gas industry, Shell announced in January that it had concluded a deal to sell its onshore business in the Niger Delta to a consortium of companies in a $2.4 billion deal.

Chalk these lost investments up to “exchange rate volatility and runaway inflation,” says Afrinvest’s Asimiyu, while economist Okeke blames an “asphyxiating” business environment. “They are choked out of existence,” he says, “so they give us all kinds of excuses.”

The causes of these pullouts are more complicated, presidential adviser Fasua counters. “Many of the companies are leaving based on their strategies,” he says, citing GSK’s exit from Kenya just four months after leaving Nigeria.

Instead of seeing the companies’ exit as a problem, Nigerians should look at the development as an opportunity, he suggests.

“By now, many of our pharmaceutical companies should be able to step up,” Fasua says, “and I see it as an opportunity for many companies that want to go into that business. Why are we twisting the narrative that the economy is dying?”

While he agrees that some of these exits were strategic decisions, Yinkere insists that Nigeria’s difficult operating environment hastened some of them. To halt the outflow, he wants the government to focus on macroeconomic stability and creating a friendlier business environment. “The high inflation and currency challenges must be addressed to stir investor confidence,” he says.

Yinkere expects the central bank to maintain a tighter monetary policy, at least in the first half of the year in the face of high inflation and currency challenges. This is in line with position of the IMF, which sees “continuing to raise the monetary policy rate until it is positive in real terms [as] an important signal of the direction of monetary policy.” Nigeria’s monetary policy rate was 18.75% in January and rose to 22.75% in late February.

Fasua counters that Nigeria has “overused our monetary policy.” The authorities need to be careful how much they raise interest rates, which could slow down the economy and precipitate a recession. “We don’t want to go there.” Fasua says.  “We need growth.”

On the fiscal side, the government has set up a Presidential Fiscal Policy and Tax Reforms Committee to make proposals for raising domestic revenue to support investments in infrastructure, health, and education. The hope is that the committee will come up with actionable proposals to generate more revenue in 2024 and beyond.