A recent report by Standard Bank, the ‘Africa Trade Barometer’ revealed that investor confidence in Nigeria has weakened in the last year despite the country’s economic reforms.
According to the report, Nigeria experienced the largest decline in business confidence among the ten African countries where businesses were surveyed.
Over the years, the number of Nigerians living below the poverty line has risen from 70 million in 2010 to an estimated 129 million in 2024, making it one of the poorest countries in the world. Nigeria also ranks 161 on the Human Development Index, making it a low-human-development country. To address these challenges, President Bola Ahmed Tinubu on his assumption of office in 2023, introduced a series of economic reform policies.
A series of far-reaching and long-overdue reforms aimed at stabilizing the economy and setting the country on the growth path include the unification of the country’s exchange rate by the Central Bank of Nigeria, clearing the verified foreign exchange (FX) backlog, and tightening monetary policy. The country also set about the elimination of the subsidy being paid on petroleum products, which had cost the country over 8.6 trillion naira (US$22.2 billion) from 2019 to 2022.
Unification of The Exchange Rate
The liberalization of the exchange rate by the central bank consolidates the multiple exchange rate systems hitherto operational in the country into a unified market. This initiative was primarily due to the significant depreciation of the naira. Under the naira float, the plan was to allow the market forces of demand and supply to determine the value of the naira but in June 2023, the Naira fell further by 36% on the official market and has since lost 70% of its value amidst dollar scarcity and global market unrest.
Clearing The Country’s FX Backlog
The CBN in March this year announced it had cleared up its Foreign Exchange backlog of $ 7 billion in claims, having made it a priority to restore credibility and confidence in the Nigerian economy. The clearing of the FX backlog helped push the country’s foreign exchange reserves to $39 billion.
Elimination of petrol subsidy
The government has also set about the removal of the petrol subsidy, which had cost the country over 8.6 trillion naira (US$22.2 billion) from 2019 to 2022 due to its unsustainability. The money saved from this removal was to be reinvested in other sectors of the economy. However, the removal of this petrol subsidy led to an increase in the pump price of petrol, the cost of transportation, and widespread inflation.
Why These Measures are Weakening Investor Confidence
When the Nigerian government set out on the path of its ongoing economic reforms, the idea was to galvanize the economy and drive Foreign Direct investment.
However, a year on from the commencement of these reforms, investor confidence is effectively waning due to a variety of factors. The unification of the official market and parallel market exchange rate and the floating of the naira have been ineffective due to the increasing global scarcity of the dollar, which has affected businesses dealing with the foreign currency.
A dollar today is worth N1,715 due to constant fluctuations occasioned by the floating of the naira by the CBN. There is also a shortage of the dollar, which poses a great threat to foreign investors.
The volatility of the Naira has made investors unwilling to invest in Nigeria, and those already in the country are increasingly moving their businesses from the country, leading to a loss of FDI and a major setback to the country’s economic reforms.
This can be attributed to the fact that the devaluation of the naira means the value of the naira in comparison to the dollar can drop at any point in time depending on demand and supply making investing in Nigeria a very high risk.
Mass Exodus
More than 10 major companies left Nigeria in 2023, notably Unilever Nigeria PLC, Procter & Gamble Nigeria, GlaxoSmithKline Consumer Nigeria Ltd, ShopRite Nigeria, Sanofi-Aventis Nigeria Ltd, Equinox Nigeria, and Bolt Food & Jumia Food Nigeria.
In 2024 so far, notable companies to have left Nigeria include Microsoft Nigeria, Total Energies Nigeria (affected by its divestment), PZ Cussons Nigeria PLC, Kimberly-Clerk Nigeria, and Diageo PLC, with even more threatening to leave. This shows a weakening investor confidence in the government’s ability to turn the country’s economic situation around.
Also, the ailing power infrastructure in the country has posed a great challenge to the country’s economic reforms. Economic losses arising from Nigeria’s electricity shortages are estimated to be USD 26 billion annually without accounting for spending on fuel for off-grid generators, which is estimated to be a further USD 22 billion.
As a result, the drive to diversify the economy is put in jeopardy due to the country’s inability to effectively fix its power infrastructure and boost the economic landscape, leading to a loss of investor confidence in the country.
Significance
Despite the ongoing economic reforms being highly commendable, it would be an exercise in futility if investor confidence in Nigeria is allowed to wane.
An integral part of revitalizing the country’s economy is attracting as much Foreign investment as possible into the Nigerian economy.
At the moment investor confidence is low; there is, therefore, a need to boost investor confidence once again if the benefits of the ongoing economic reforms are to be fully enjoyed.