Foreign direct investment and the nigerian economy

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The state ‘s currency exchange rate since the Obasanjo ‘s disposal has been more in a stable rate than old governments that witnessed volatility of the state ‘s currency the naira in the foreign exchange market. The state ‘s exchange rate no uncertainty has besides been a lending factor to the influx of the FDI. The recent call by the World Bank for Nigeria farther devalue currency to hike economic growing through FDI inflow nevertheless, has been met with stiff responses by the state ‘s current cardinal bank governor, who thinks that the naira is non over valued as the universe bank is claiming ( CBN,2011 ) .

Deductions of the current determination are arrow to the fact that the state ‘s economic system is earnestly dependent on oil. Though some surveies have shown that non oil FDI particularly in the telecommunication and agribusiness have considerably impact on the economic growing of the state, this is have small significance compared with the FDI oil part to economic growing of Nigeria ( Okoh, 2009 ) . However, the demand to diversify the economic system can non be overemphasized. Concrete stairss toward the development of little and average graduated table industries to impact on economic system demands to be embarked upon with all earnestness and focal point.

The Nigerian economic system is in desperate demand of variegation, holding had crude oil and its bye-products as pillars for over half a century. Oil and gas represents 98 per centum of Nigeria ‘s entire export gross and amounted to $ 58 billion in 2006, trebling the state ‘s trade excess since 2002.

With the deregulating of the telecommunication sector, Nigeria ‘s telecommunications sector is now in a rapid growing manner. Harmonizing to the Nigerian Communications Commission ( NCC ) , there ‘s tremendous growing potency in the market, as demand for telecom service has been high because of market liberalisation and monolithic telecom investings. Over recent old ages, all subdivisions of the telecom industry have generated considerable growing and the telecom industry has emerged as a chief motor of the state ‘s economic system. It is merely the oil sector that has seen more investing and telecom is now seen as the most moneymaking subdivision for investing in Nigeria ‘s economic system.

As a consequence, Nigeria soon boasts Africa ‘s largest and most promising telecom market. Even though Nigeria is draging other states in footings of supplying phone engineering at an low-cost monetary value and making so faithfully, the market has taken important paces in its development ( Ariyo 2005 ) .

The domestic debt stock of the Federal Government outstanding at end-December 2008 stood at N2, 320.3 billion, stand foring an addition of 6.9 per cent over the degree in 2007. The addition was due chiefly to the issue of new series of FGN Bonds deserving N495.6 billion in an attempt to reconstitute the domestic debt, every bit good as finance undertaking and the colony of other authorities duties. The banking system remained the dominant holder of entire domestic debt outstanding with 74.7 per cent, while the non-bank populace accounted for the balance of 25.3 per cent. A decomposition of the banking system ‘s retentions indicated that N1,451.8 billion, or 83.7 per cent was held by the DMBs and DHs, and N282.3 billion, or 16.3 per cent, by CBN.

Analysis of Nigeria ‘s debt sustainability signified that the debt stock/GDP ratio remained low relation to the maximal international threshold of 30.0 per cent of GDP as it improved from 12.5 per cent in 2007 to 11.6 per cent in 2008. Besides, the debt stock/revenue ratio showed a stronger place in 2008 as 88.0 per cent of the entire gross could deliver the entire debt stock, compared with 111.3 per cent in 2007. Furthermore, the debt service/revenue ratio improved from 13.9 per cent in 2007 to 10.5 per cent in 2008, connoting that merely about 10.5 per cent of the entire gross was devoted to involvement and chief refunds. The improved sustainability ratios reflected the moderate growing of the economic system and the impressive public presentation of the Federal Government-retained gross relation to the predating twelvemonth.

Provisional informations from the National Bureau of Statistics ( NBS ) showed that the Gross Domestic Product ( GDP ) , measured at 1990 changeless basic monetary values, stood at N674.9 billion in 2008 bespeaking a growing rate of 6.4 per cent. This was about the same as the 6.5 per cent recorded in 2007 and the mean one-year projected growing rate for the period 2004 – 2008. Agribusiness accounted for about half of the GDP growing rate, lending about 2.8 per centum points, followed by sweeping and retail trade with 2.3 per centum points ; services, 1.7 per centum points ; and edifice and building 0.2 per centum point. Industry as a group, nevertheless, made a negative part of 0.5 per centum point. Growth in 2008 was attributed mostly to sound pecuniary and financial policies every bit good as the favorable conditions conditions which boosted agricultural end product, notwithstanding the inclement conditions conditions experienced in some food-processing countries. The banking sector consolidation, which improved handiness of recognition to the private sector and comparative stableness in the goods and foreign exchange markets besides contributed to the improved economic public presentation. Stability in monetary values and a steady supply of crude oil merchandises were besides supportive of growing. The 6.4 per cent growing in GDP was, nevertheless, lower than the mark growing rate of 10.0 per cent.

Non-oil GDP grew by 9.1 per cent in 2008, compared with 9.5 per cent in 2007. The public presentation was driven mostly by the agricultural sector, which grew by 6.5 per cent, underpinned by the robust growing in all its constituents. Other drivers of growing in non-oil GDP included sweeping and retail trade, edifice and building, and services, which recorded growing rates of 14.0, 13.1 and 10.5 per cent, severally. In the services sector, communications recorded the highest growing rate of 34.0 per cent, buoyed by the sustained liberalization and enlargement of telecommunication services. Other constituents of the services sector recorded impressive growing rates every bit good. In contrast, industrial end product fell by 2.2 per cent, attributable chiefly to the 4.8 per cent bead in rough oil production, even as the solid minerals and fabricating sub-sectors grew by 12.9 and 9.3 per centum, severally.

A farther sectoral analysis indicated that the agricultural sub-sector contributed the largest portion of 42.1 per cent to the existent GDP in 2008, compared with 42.0 per cent in 2007. The portion of industry and rough oil in the GDP declined from 23.9 and 19.6 per cent in 2007, severally, to 22.0 and 17.5 per cent in 2008. The parts of solid minerals and fabricating constituents of industry remained undistinguished Services as a group contributed 16.8 per cent to the GDP, of which finance and insurance, public-service corporations, communications and conveyance accounted for 3.8, 3.4, 3.0 and 2.7 per centum points, severally.

In Nigeria, the rush in the monetary values of nutrient and other indispensable trade goods has been dismaying. For illustration, the monetary value of a 50 kilogram bag of the premium trade name of imported rice ( caprice gold ) which stood at about N7,500 in December 2007 has risen astronomically to N14, 000 by March 2008, stand foring a 87 per cent monetary value addition. Similarly, the monetary values of palm oil, corn, guinea maize, beans and garri rose by 36, 28, 16, 12 and 8 per cent, severally, over the same period.

There are both distant and immediate causes of the current nutrient monetary value additions in Nigeria. First is the weak production construction in the agricultural sector. The farm landscape is dominated by smallholder husbandmans who still use petroleum implements and operate traditional, inefficient production methods. The degree of tractor usage is still really low with the full state holding merely approximately 30, 000 tractors, half of which are non functional. This compares unfavorably with India ( besides an emerging economic system ) , where the province of Punjab entirely can tout of 450,000 functional tractors. Besides, the mean planetary rate of NPK fertiliser application is 93 kilogram per hectare, while that of Nigeria is a mere 13 kilogram per hectare. Storage and processing installations are grossly unequal and inefficient, reflecting the high degree of post-harvest losingss, estimated at about 50 per cent for fruits and veggies, and 30 per centum for root harvests and tubers.

Second is the famine of support substructure, notably an inefficient transit system and the high cost of energy, both of which constrain the motion of farm green goods from rural to urban Centres. The railroad system has virtually been grounded in the last two decennaries, thereby doing the bulk motion of grocery from production Centres to the markets impossible. The cost of Diesel to power trucks that convey nutrient materials across the state has been surging and sold above N160 per liter in 2008.

Chapter FIVE

5.1 Summary

Investing is normally the major determiner of any economic system, which is in bend determined by the accretion of capital that has been realized from domestic nest eggs and foreign exchange net incomes. Unfortunately these are missing in less developed states thereby impacting the growing of their several economic systems. Nigeria has non had enough domestic nest eggs and foreign exchange net incomes sufficient to run into up with the needed degree of investing that is needed to accomplish coveted economic growing. This has created nest eggs and foreign exchange spread. The consequence of the present survey has shown that FDI oil exerts appositional impact on the economic growing of Nigeria within the period under survey.

The survey examined the pertinence of the export-led growing ( ELG ) hypothesis utilizing grounds from Nigeria. The function of FDI in the non oil exports – growing link was besides examined. A causality analysis of the relevant variable was undertaken in order to verify the relevancy of the ELG hypothesis in the Nigerian economic system. Empirical grounds from available informations failed to back up the export-led growing hypothesis in Nigeria. Besides, the dynamic interaction among FDI, non-oil exports, and growing of the Nigerian economic system was besides investigated utilizing the construct of discrepancy decomposition and impulse response analysis. The consequence of the discrepancy decomposition supports an earlier consequence obtained from the causality analysis which revealed that, a unidirectional causality runs from FDI to NOX. Responses of the three variables to one criterion divergence inventions were on the norm, found to be hibernating in the early phases of the out-of-sample prognosis period but all demonstrated marked responses after about 7 old ages into the prognosis period.

This paper has looked at the determiners of FDI in Nigeria and it shows that a strong market and macroeconomic stableness and natural resource gifts promote FDI while political instability and the passage to democracy hold the opposite consequence. This suggests that a strong market and macroeconomic stableness encourages foreign investing in Nigeria while political instability discourages foreign investing. However democracy, which was used as an index of political stableness, suggests that foreign investing which is chiefly based geared towards the oil sector is non stimulated by the presence of a democratic authorities.

5.2. Decision

The aim of the probe was to analyze the foreign direct investing in the oil sector and its attendant consequence to the growing of the Nigerian economic system in footings of the Real Gross Domestic Product. The undertaking is non an easy one, as research shows that Nigeria is non even in the top 10 of FDI finish where the least state, Thailand received $ 9.6 billion in 2007, harmonizing to World Bank research contained in Global Development Finance 2008. Unsurprisingly, harmonizing to Goldman Sachs, the majority of FDI influxs ( 55 per centum in 2006 ) went to the oil and gas sector. But other sectors have besides benefited, peculiarly the banking and substructure sectors.

The research by Goldman Sachs notes that the FDI growing is on the dorsum of Nigeria ‘s bettering economic clime, with GDP speed uping an mean seven per centum in the last five old ages. Imports have besides risen quickly and much of this in the signifier of investing goods for the oil sector. Trade excess has risen to $ 40bn ( up from $ 28bn in 2006 and merely $ 5bn in 2002 ) . The mentality interestingly besides looks favorable as official figures put marks for 2008 at 10 per centum. It is expected that exports would turn to $ 92bn in 2008, presuming oil production of 2mn bpd. It is besides believed that the current history would run a excess of 9 per centum of GDP in 2008, up from a shortage of 3 per centum in 2003. The favorable mentality suggests that FDI would go on to pour in, but at what rate?

Goldman Sachs three old ages ago predicted that the state would calculate in the top 20 economic systems by 2020. Soon after, it appeared on the radio detection and ranging of Fitch, so Standard and Poor ‘s, two evaluation bureau, which gave the state high Markss. Since so international investors have been looking in and even taking places in some of the most attractive sectors of the economic system. One such investor, a private equity house even re-wrote the BRIC ( Brazil, Russia, India and China ) acronym as BRINC with the ‘N ‘ standing for Nigeria.

5.3. RECOMMENDATIONS

It should besides better the general macroeconomic and institutional models, including stable and high economic growing rate, broad exchange rates, exchangeable currency, low rising prices, minimum current history shortage and external liability, low involvement rates and entree to capital, efficient banking system and capital markets, and competitory corporate revenue enhancement rates. Government of Nigeria should supply substructure, engineering, and human and other competences to degrees that facilitate full realisation of FDI benefits by set uping focussed programmes of cut downing the cost of making concern, with such elements as bettering the quality and cut downing the cost of substructure ( transit, roads, electricity, and telecommunications, among others ) . Finally, Nigeria ‘s policy shapers should explicate and implement effectual investing publicity policies, including national selling enterprises, but merely after the cardinal determiners of FDI are in topographic point.

The demand for local sourcing of natural stuffs and input through agribusiness should be intensified. A technological policy aimed at developing a local technology industry is advocated. By so making, the nexus between agribusiness and the fabrication sector will be established, taking to enlargement of export base which would pull more foreign exchange into the state. This could climax into high external militias build -up and cut down inauspicious force per unit area on balance of payment.

Manufacturing activities should be encouraged by authorities by giving inducements and subsidies to local makers and bettering the technological and substructure development so as to increase the sector ‘s part to Gross Domestic merchandise and employment within the state.

Change in exchange rate direction scheme should be allowed to run a sensible class of clip. Jettisoning schemes at will and on frequent footing has deduction for exchange rate and obvious effect for a sector that depends on foreign inputs. The pecuniary authorization ( the Central Bank of Nigeria ) should supervise the unethical patterns of some commercial bank which have resulted in much fluctuation in the rate of exchange. More rigorous punitory steps have to be taken against the culprit Bankss.