COVID-19: Impact On Foreign Direct Investment in Nigeria

Introduction

In the last few decades, Nigeria has enjoyed the buoyant impact of Foreign Direct Investment, especially with the emergence of the Fintech industry and other industries who have taken bold steps towards digital transformation.

In 2018 alone, Nigeria recorded over USD99.6b in foreign direct investment – which represented about 25.1% of the country’s GDP. According to a statement issued by The United Nations Agency on the impact of the COVID 19 pandemic on Global FDI (Foreign Direct Investment), Nigeria recorded an inflow of $200.08million from the first three quarters in 2019.

The total figure, however, is yet to be available.

Since the beginning of the pandemic outbreak, especially after recording its first death – global foreign direct investments projects have dropped significantly. Market estimation by the UNCTAD shows the impact of coronavirus sped up this decline and is to fall between 5 – 15% by the first half of the year.

Countrywide effect

The price of crude oil hit its worst level in more than a decade, dropping from $59 to $28 per barrel in a month, because of low demand and discord between Organization of the Petroleum Exporting Countries (OPEC) and Russia to reduce supply.

For Nigeria, where revenue from oil production makes 31% of the 2020 budget revenue, and oil accounts for 90% of foreign exchange, the effect of the sharp and persistent decline in the price of crude oil will lead to cuts in government spending and net exports. These are two critical components of economic output.

It is most likely that COVID-19 will lead to a recession. Like most recessions either caused by demand, supply or financial shocks, the COVID-19 pandemic delivers all three in a single package. A shut down of movement will lead to a massive decline in economic output, income and consumer spending. 

General Economic Implications

The direct impact of this pandemic hit the price of crude oil, which has fallen by a great margin. Nigeria as a nation has been heavily reliant on the production of crude oil which has helped stabilize the economy over the years.

With the virus gaining momentum, there would be a concern for foreign investors to invest in Nigeria because of the weakness of the country’s foundation in crude oil production.

As the virus continues to hit the nation, the investor’s appetite for investing in Nigeria is gradually declining because of its direct relationship with the crude oil industry.

COVID-19 Impact on Foreign Direct Investments

There are several foreign direct investment projects across all sectors of the Nigerian economy. The outbreak affected these sectors the investors as well. Below is a summary of how the virus could affect foreign direct investment;

• Exposure to foreign exchange rate and currency risk
• Many global industry conferences for investors cancelled plans. These conferences have always been a driver for foreign direct investments in Nigeria.
• The outbreak will slow down capital expenditure with industries forced to shut down or operate at lower capacity will temporarily halt new investments
• As a result of adverse demand shocks by to the virus outbreak, market efficiency would be adversely affected including resource seeking investments
• The investment impact will be more concentrated in countries that have taken the most drastic measures to contain the spread of the virus

Conclusion

Regardless of the turmoil, this global pandemic has caused, capital still needs to be raised. Some opportunistic investors have continued to invest amidst the market decline. Identifying these kinds of investors and how they key into the local economic development of Nigeria can be our opportunity in a crisis like this.

Due to the current predicament, there will be an impairment in Nigeria’s FDI flow. This is because the pandemic hit some investors hard. The countries which include; USA, China, United Kingdom, the Netherlands and France have had their economies grounded.

Hopes are high that just like previous outbreaks COVID- 19 will eventually fade. The reality is that the socio-economic impact will linger long after the virus fades.