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Until a few years ago, Nigeria had managed to attract Foreign Direct Investment (FDI) despite its poor economic outlook. This is largely because of a vibrant oil reserve and the consumption potential of the large population. However, according to the recent figures from the Central Bank of Nigeria (CBN), capital importation into the country for the production and manufacturing sector crashed last year by 48.42 per cent.
This means that the manufacturing sector, which contributes significantly to the nation’s Gross Domestic Product (GDP), is struggling to survive due to rising debt profile, interest rate hikes, inflationary headwinds, choking business environment, insecurity, inconsistent and regulatory policies.
Other challenges include unstable power supply, poor infrastructure, foreign exchange scarcity, naira depreciation, and multiple taxes that have become commonplace in many states. The CBN report and that from the United Nations Conference on Trade and Development (UNCTAD) show that foreign investment dropped by 48.2 per cent to $3.3billion in 2019 from $6.4bilion in 2018, representing about 98 per cent decline within the period under review.
In the last five years, the sector had contributed 15 per cent to the nation’s Gross Domestic Product (GDP). These include revenues and employment. According to the National Bureau of Statistics (NBS), the manufacturing sector has suffered a steady decline in the last three years. For example, from 2021 to third Quarter (Q3 2022), the sector suffered a decline of 36 per cent in profit margins. In 2020, the contribution of the manufacturing sector declined to 13 per cent out of the country’s total GDP of N152trillion (over $400billion) from 14.61 per cent in 2021, and 16.67 per cent in 2018.
Also, the combined debt of the manufacturing sector to Nigerian banks as of December 2021 rose to N5.33trillion from N4trillion in November 2022. Last year alone, the CBN hiked interest rate five times in the midst of challenging business environment. The nominal GDP of the manufacturing sector in the last quarter of 2022 fell by 16.6 per cent from 25.52 per cent recorded in 2021.
Over the last six years, foreign investment dropped by almost 80 per cent. The African Development Bank (AfDB) said inward investment in Nigeria fell by 24 per cent between 2019 and 2020. Nigeria’s net inflows based on balance of payments fell from $9billion in 2012 to below $1billion in 2018. And in 2020, Nigeria managed to attract only $687million in FDI. So far, Nigeria’s decline in foreign investment is more than that of the sub-region. Undoubtedly, Nigeria is not producing enough for both local consumption and export. Therefore, the consequences of having a weak manufacturing base with a growing population is also evident in the scarcity of foreign exchange (FX), limited job opportunities that will accommodate workforce entrants and import bill that can hardly be met by the current export earnings.
For instance, a recent NBS report shows that unemployment and underemployment rates increased to 56 per cent in the last two years.
There is no doubt that the steep decline in foreign investment is indicative of the situation in the country that started years ago, but has worsened in recent times. There is need for the incoming administration to address the burgeoning infrastructure deficit and inadequate power supply, which limit the competitiveness of the manufacturing sector and forced many companies to either shut down operations or relocate to neighbouring countries.
Government should support the scale, efficiency and competitiveness of local firms within the manufacturing sector, which is vital to rebuilding economic resilience against vulnerability and future shocks, as well as improve the Ease of Doing Business (EoDB) and end the multiple tax regimes that have undermined profitability of businesses. All of this reflects a broader trend that has slowed down foreign investment in the country.
We believe that diversifying the economy away from oil will protect inflows from global oil price volatility. Beyond that, there is need to create an enabling environment that will make foreign investment attractive and shift emphasis from consumption to production. The manufacturing sector has a much higher productivity level than agriculture and can accommodate, in large numbers, the kind of labour that is abundant in the country. Unfortunately, the combined effects of high energy costs and inflationary pressure have joined to weaken production for many operators in the manufacturing sector. In that regard, the government should develop a comprehensive framework that will facilitate the easy movement of goods and services within and outside the country. But such manufactured products must be of high quality to avoid rejection in the international markets. A few years ago, the World Trade Organisation (WTO), ranked Nigeria as the preferred destination for investors interested in trade and commerce. Not anymore, as Ghana in 2018 overtook Nigeria as the preferred destination in West Africa. Let government policymakers design and implement national skills programmes aimed at up-skilling young Nigerians to ensure that many of them embrace digital skills and capabilities. Altogether, Nigeria needs a much improved business environment that will sustain the manufacturing sector and make other sectors of the economy to thrive.
