A professional services firm, KPMG, has emphasized the importance for Nigeria to find equality in enticing foreign investment and advancing domestic growth. They suggest that the nation must implement policies that not only encourage foreign investment but also create a favorable atmosphere for local businesses to flourish. KPMG’s flashnotes, published on January 4, 2024, draw attention to the concerning trend of decreasing quarterly capital inflow figures, which indicates ongoing obstacles in maintaining investor trust in Nigeria’s economy. The firm said establishing a balance to regain foreign investors’ confidence would also lead to reduced dependence on external funding while encouraging domestic development.
It revealed that Nigeria experienced a decline in capital inflow during the third quarter of 2023. This drop came after an initial increase in the second quarter. The decrease is believed to be a result of ongoing negative market sentiments towards the country, despite positive perceptions of initial reforms. Moreover, the trending trade credits, loans, and other forms of short-term capital inflows, particularly portfolio and foreign direct investment, is a significant cause for concern, stated KPMG.
Short-term nature of trade credit is a cause for concern.
Foreign investors are wary of Nigeria due to the country’s current economic climate, which is characterized by negative interest rates, a significant foreign exchange imbalance, low and falling forex reserves, and a lack of clarity on monetary and fiscal policy. The problem has been exacerbated, according to KPMG, by the departure of multinational corporations like GlaxoSmithKline and Procter & Gamble (P&G), which have ceased their operations on the ground and have instead established business models that are led by imports and distributors.
Concerningly, the firm stated that the short-term nature of trade credit, loans, and related kinds of capital inflows is a cause for concern, since they currently constitute the majority of capital inflows. Rapidly diminishing since the onset of Q1 2023, portfolio investment, encompassing investments in stocks, bonds, and various other securities, has undergone a staggering decline from $649.28 million to a mere $87.11 million during the third quarter of 2023. This alarming plunge has left the economy vulnerable to foreign exchange illiquidity as well as currency depreciation, consequently posing substantial risks.
Investors are still hesitant to commit or stay in Nigeria.
This decline in portfolio investment has exerted immense pressure on consumer price inflation and significantly reduced purchasing power, ultimately leading to a deceleration in economic growth, with a target rate of 3.75 percent in 2024, decreased employment growth (particularly due to ongoing declines in foreign direct investment), and instability in the broader macroeconomic landscape. In light of the ongoing global poly-crisis, KPMG warns that the economy becomes increasingly susceptible to international economic shocks, raising concerns. The reduction in foreign capital inflows, due to this vulnerability, restricts access to essential external funding for infrastructure projects, technological advancements, and various development initiatives.
Consequently, the cost of doing business escalates, investment opportunities lose their appeal, and the country’s competitiveness on a global scale dwindles. KPMG highlighted that, despite the acknowledged potential of Nigeria, investors are still hesitant to commit or stay in a nation plagued with concerns pertaining to infrastructure, logistics, connectivity, and operational efficiency. According to the firm, the investor community desires a stable and predictable business environment. However, the absence of these elements hinders the flow of capital.
Related Article: KPMG predicts Nigeria inflation to hit 30%
The firm urges immediate action to overturn this trend and regain investors’ trust within the Nigerian economy. This can be achieved by enhancing current measures to establish a secure and supportive macroeconomic atmosphere and implementing policies that are consistently favorable for investors. Nigeria has the potential to counteract this prevailing trend through enhanced infrastructure, bolstered competitiveness in macroeconomic principles, and the removal of hindrances posed by structural and regulatory obstacles that impede inflow and outflow of capital. This initiative requires effort by the Nigerian government and other key players must work together, KPMG said.