What does the current Investment landscape look like in Nigeria?

Lagos, Nigeria: Spiegel

Often referred to as the “Giant of Africa,” Nigeria has always presented opportunities for investors. With its vast natural resources, growing population, and strategic location, the country has attracted both domestic and foreign investors seeking to capitalize on its potential. However, in recent years, there has been a noticeable trend of investors exiting Nigeria’s market.

A few months ago, one of the top global pharmaceutical giants, GlaxoSmithKline (GSK), exited Nigeria. GSK was a leading pharmaceutical manufacturer with 51 years of operations in Nigeria and its departure led to a notable surge in the prices of GSK medications, with increases reported to be as high as 1000 percent. Recently, Procter & Gamble (P&G), the world’s largest personal care and household products company, makers of iconic brands like Pampers and Gillette, also left Nigeria for the same reason as GSK. In this article, we will examine the prevailing reasons why investors are leaving the Nigerian market and what the future holds for the economy.

Nigeria has always managed to attract foreign direct investment despite its poor economic outlook, thanks to its oil reserves and the consumption potential of its large population. However, these inflows of foreign investment have been in decline and now seem to have hit a halt. Over the past few years, foreign direct investment in Nigeria has dropped by almost 80%. This partly reflects a broader trend for the region: according to the African Development Bank, inward investment fell by almost 24% between 2019 and 2020. Investors around the world were also cautious about risky markets during the COVID-19 pandemic. But foreign investment inflows to Nigeria had been falling even before the pandemic. The country’s net inflows based on the balance of payments fell from about US$9 billion in 2012 to below US$1 billion in 2018. So, Nigeria’s 80% drop is steeper than the region’s, suggesting another dynamic at play. The question is, what could this dynamic be? What has successfully caused a decline in foreign investments chasing investors from the Nigerian market?

Nigeria scares away multinational companies because the purchasing power of most Nigerians is nose-diving every day. The weak implementation of the rule of law and a lack of a conducive business environment make it difficult to retain such “iconic companies.” According to the National Bureau of Statistics (NBS), Nigeria’s inflation rate as of December 2023 stood at 28.92 percent, the highest recorded since August 2005. This persistent upward trend in inflation has been a key driver in the rising costs of various goods and services, including inputs used in production. As income remains constant for the average Nigerian, the real wage continues to fall, making it difficult to purchase the same basket of goods with the same level of income leading to a drop in the purchasing power of the average Nigerian. Good business entails an increase in sales and production for investors, so leaving a market with a persistent fall in purchasing power is quite justifiable. 

Another key factor driving investors away from Nigeria’s market is political instability. The country has experienced a series of political upheavals, including contentious elections and frequent changes in government. These uncertainties create an environment of unpredictability, making it difficult for investors to plan for the long term. Moreover, corruption and bureaucratic red tape further exacerbate the situation, eroding investor confidence. When investors lack faith in the stability and integrity of the political system, they are more likely to withdraw their investments and seek opportunities elsewhere. Nigeria is known to be flexible in terms of political decisions, leaving it at the whims and caprices of its leaders. A policy that is in play today might become completely irrelevant tomorrow when a new political party comes into play. Globally, only a few businesses can thrive in a region with little to no political stability, as is the case with Nigeria.

Another major factor behind investor withdrawal is the prevailing security concerns in Nigeria. The country is grappling with a variety of security challenges, including insurgency and mass violence. These issues not only threaten personal safety but also create a volatile business environment. Investors are reluctant to do business in areas experiencing violence because of the risk to their assets and personnel. The lack of adequate safeguards and the government’s inability to effectively address these challenges have led to a loss of investor confidence, prompting investors to exit the Nigerian market. Businesses want to ensure the security of their operations, employees, and profits, but Nigeria does not seem to be able to achieve that.

Its impact on the economy is quite enormous. Looking at it from the economic standpoint, when existing investors leave the market and there are no incentives to attract other investors, it leads to a fall in the productivity of the economy. GDP falls, and the unemployment rate increases, thereby worsening the standard of living of the populace. Nationally, 43 percent of Nigerians (89 million people) live below the poverty line, while another 25 percent (53 million) are vulnerable. This could be traced to the increase in crimes and insurgency within the nation, as the African saying always goes, “An idle man is the devil’s workshop.” Additionally, currency depreciation and increased interest rates could be potential consequences, as it affects various sectors of the economy.

At this point, there is a need for leaders with strong political will. The government may need to reform numerous policies and implement transparent and consistent policies to create a stable business environment, ensuring investors are confident in the regulatory framework. Talking about being stable, there is also a need to maintain political stability and demonstrate commitment to good governance, as political instability can deter potential investors. Infrastructural development cannot be overlooked. They could invest in critical infrastructure, such as transportation, energy, and telecommunications, to enhance the overall business environment and reduce operational costs for investors. Tax incentives are another side of the same coin. The government could introduce tax incentives and breaks to attract foreign investors, making the tax environment more favorable for businesses. If there is a decrease in tax, there would be an increase in dividends and disposable income which would be plunged back into the economy for more productive activities.