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Attracting FDI to Nigeria's non-oil sectors 12 Jun 2016

Fiscal policy in any number of oil-producing developing countries is historically procyclical. Government expenditure, investment and consumption, having been lifted by high commodity prices, are left crashing down during sustained dip in the prices. Therefore, the end of the commodity "super-cycle" has left many of these countries in the grip of prolonged fiscal imbalances.
    
Given the emerging realization that oil prices would remain volatile amid a global economy that is experiencing weak recovery, developing countries like Nigeria can sustainably boost output and achieve economic stability only by deploying counter-cyclical fiscal tools. With this awareness, the Administration of President Muhammadu Buhari would have taken the wrong policy decision if it had cut capital expenditure and skimped on social investment because of low oil revenue. This would have been a recipe for hampering long-term growth and hurting the poor.

Instead, the President responded to Nigeria's fiscal challenges by not taking the intuitive approach. By increasing the federal budget and pursuing increased investment in capital expenditure, the government is poised to decorrelate commodity prices, investment and output growth. Capital expenditure was increased from N643 billion in 2015 to N1.59 trillion in the 2016 budget to unlock the output growth that is shut-in by major swings in oil prices and finally put Nigeria on the path of structural transformation.

The current countervailing realities, including the difficulty in raising the needed financing for the budget, might create doubts as to the effectiveness of this strategy for now. But ultimately, the strategy will prove decisive. Increasing capital investment in infrastructure will spur private sector investments in the broader non-oil sectors. This strategy should inspire confidence in the long-term growth prospects of the Nigerian economy by both the Nigerian and international investment community.

The government has planned over 40 capital projects spanning roads, railways, aviation, power, agriculture, housing, water, education and health in the various geopolitical zones of the country. In addition to targeted social investment, this aligns with recent trends in national investment policies that attracted Foreign Direct Investment (FDI) to non-oil sectors.

According to the United Nations Conference on Trade and Development (UNCTAD), global FDI flows increased 36 percent in 2015 to an estimated $1.7 trillion, their highest level since the Global Financial Crisis of 2008-2009. Developing Asia accounted for one-third of the FDI flows last year. The reason is clearly understood by students of international investment. Asia has been the growth engine for manufacturing and services FDI, with services FDI stock in the region increasing from about $800 billion in 2001 to $3.5 trillion in 2012.

But despite the jump in global FDI flows last year and the record inflows to developing countries, foreign investment in Africa's real economy was downbeat. FDI inflows to Africa in 2015 fell 31 percent from $54 billion recorded in 2014 to an estimated $38 billion, owing to the slump in commodity prices. While Nigeria's FDI fell 27 percent from $4.7 billion in 2014 to $3.4 billion in 2015, South Africa's declined by 74 percent to $1.5 billion last year, from $5.7 billion in the previous year.

The decline in FDI to the region correlates with weakening economic growth. GDP growth rate slowed to 4.5 percent in 2014, and it further declined to 3.5 percent last year – which is way below average 6 percent recorded in the decade before oil prices began to plunge nearly two years ago. As the outlook of oil prices remain low, projections of the continent's GDP growth in 2016 by the African Development Bank, the IMF and the World Bank range from 3 percent to 3.7 percent.

Are there policy choices that Nigeria can deploy to disentangle the negative correlation between declining output and fiscal imbalance caused by low oil revenue? The answer is a bold yes. Attracting more investment into the non-oil sectors will offset the current decline in total output and avoid the looming stagflation, a phenomenon caused by a combination of rising inflation, slower real economic growth, and a tight job market.

As the Asian story has proved, investment in infrastructure and improvement in human capital is key to attracting strong FDI in the non-oil sectors. Nigeria needs to increase the stock of FDI in transportation, power and communication infrastructure, as well as in agriculture and services. Data for the most recently available year (2012) provided by UNCTAD shows that between 2002 and 2012, Nigeria's services sector attracted $30 billion or 39 percent of Nigeria's total FDI stock in that period. This is largely attributable to the liberalisation of the telecommunications sector and the expansion of the Nigerian banking sector as a result of the banking consolidation that occurred in the mid-2000s.  

However, this is still low, compared to the regional and global average of services FDI, which is 63 percent. In Morocco, services account for more than 60 percent of FDI stock, which has driven the North African country to become a key services hub in the region. Major multinational enterprises have located their regional headquarters in Casablanca's “Finance  City”. South Africa's services sector accounted for 51 percent of FDI inflows in 2014.

The objective of reforming Nigeria's investment policy includes liberalisation of the non-oil sectors of agriculture, manufacturing, services and their value chains. From all indications, the current administration is working hard to improve international investment relations with Nigeria to achieve stability and predictability, and reduce corruption in the process. These are important elements in facilitating long-term investments and also ensuring the protection of those investments.

The Nigerian manufacturing sector has seen an expansion since the implementation of the National Automotive Industry Development Plan (NAIDP) in 2013. With the investment being made by global automakers like Peugeot, Nissan and Hyundai, Nigeria is seen as an emerging automotive manufacturing hub in Africa.

More is being done by the current Administration to strengthen the national investment policy framework as seen in the establishment of Public Private Partnerships for major capital projects. The government of President Buhari plans to concession the country's four busiest international airports in Lagos, Abuja, Port Harcourt, and Kano for the optimal performance of the country's aviation sector. According to the National Bureau of Statistics, the four airports handled about 1,060,186 international passengers in the fourth quarter of 2015.

Also, the Nigeria Sovereign Investment Authority (NSIA), the government's agency that manages the Nigerian Sovereign Wealth Fund, plans the concession of the Second Niger Bridge, to which about N13 billion has been allocated in the 2016 budget. The Lagos State government is also ramping up infrastructure projects with the newly signed concession contract to build the much-awaited 4th Mainland Bridge to ease the traffic gridlock in the sprawling economic capital of Nigeria.

China, the world's largest investor in 2014, is supporting the Nigerian infrastructure investment plan with a $6 billion credit and a $15 million agricultural assistance for the establishment of Agricultural Demonstration Farms across the country with the aim to boost food production. But there is more to learn from China in terms of leveraging Special Economic Zones (SEZs) to attract non-oil FDI, increase employment, export and national GDP.

According to a World Bank definition, SEZs cover a broad range of zones, such as free trade zones, export-processing zones, industrial parks, economic and technology  development  zones,  high-tech  zones,  science  and  innovation  parks,  free  ports, enterprise zones, and others. These zones have contributed in bringing new technologies to China. SEZs also accounted for 22 percent of China's GDP and 46 of the country's inward FDI as of 2010.

SEZs have been implemented in different African countries, including in Nigeria, since 2009. However, they are few and far between and have had limited impact in terms of achieving their objectives.

With new investment incentives that come with these economic zones, establishing at least one zone in every state of the federation will be a viable strategy to grow FDI inflows to Nigeria, boost technological innovation in the country, reduce unemployment, revitalise exports, increase government's non-oil revenue, and achieve much-needed fiscal balance.