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Foreign Investment: Forget Sokoto, Target ‘Shokoto – Alex Otti

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“We shall not cease from exploration, and the end of all our exploring will be to arrive where we started and know the place for the first time” – T. S. Eliot (1888-1965)

There is this popular Lagos saying that people have the tendency of looking for opportunities or valuables in Sokoto when in fact, those opportunities exist in ‘shokoto’ also spelt as Sokoto, but pronounced differently. Sokoto is the Capital of Sokoto State in Nigeria which is understood to be very far from Lagos. It is about 980 kilometers away from Lagos and can take a better part of a day’s journey by road depending on the state of the road and the speed of travel. Shokoto (Sokoto), on the other hand is a Yoruba name for trousers or pants as Americans will call it. Literally, the saying describes a situation where you have a solution with you and you are traveling hundreds of miles away looking for same solution. We shall return to this shortly.

It is no longer news that the Nigerian economy is struggling. Amongst all the challenges the economy is facing, is the revenue challenge, or more rightly the cost challenge which continues to outstrip revenue. In the last three years, we have only been able to raise a little over 50% of our annual revenue projections as per our budgets. Without extra- budgetary borrowings, all we would be able to implement is at best, half of the expenditure budget. If this trend continues, the over N10 trillion budget for this year would also only be partially implemented. Matters are not helped by the burgeoning population which continues to put enormous pressure on available resources. Meanwhile, economic growth slowed down alarmingly and now stands at less than 2% per annum. Finding a solution to these intractable challenges has become the preoccupation of experts and those who genuinely care about the economy. There is no doubt that many of our young people are either unemployed or underemployed, with the unemployment rate expected to increase to 33.5% in the course of the year. Youth unemployment figures are even more scary as they are estimated to be over 60%. To put it graphically, about 6 Nigerians drop into the poverty basket every minute. The number of people living below poverty line is chasing 100 million and that amounts to roughly half of the population. It is a no brainer that if the economy attracts more investments, jobs would be created, productivity would increase and the economy would do a lot better. The big question is: where will such needed investment come from? Conventional wisdom has it that the best source of investment is from outside the shores of the country. That is called Foreign Private Investment. Our leaders, in their knee-jerk response to that conventional wisdom, have been trooping out of the country ‘in search of foreign investment’. In fact, some state governors have virtually relocated abroad, in search of foreign investment. It has become a mantra and the circus gets into greater frenzy as the economy slows and the unemployment figure continues to soar. How successful they have been in their international road shows, is a matter beyond the scope of this essay. We, however, will like to interrogate this belief that foreign investment is the panacea for the growth of the economy.

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For the purpose of context, it is important to state that there are two types of foreign investment, namely foreign direct investment and foreign portfolio investment. Foreign Portfolio Investment refers to remittance of funds from abroad into a country for the purpose of purchasing stocks and bonds in the market, most times for speculative purposes. So, it simply involves investing in the financial assets of a target country on a short term basis for the sole purpose of profit. Decisions here are made based on foreign exchange stability amongst a few others. The behavior of foreign portfolio investment has earned it the sobriquet, ‘Hot Money’. It is essentially there when things are good and once there is any sign whatsoever of turbulence, it takes flight! Foreign Direct Investment, on the other hand, refers to the movement of funds from abroad to a local country for the purpose of investing in business assets, again for profit. Here a company, institution or individual moves money to another country to set up business, buy business or expand existing businesses from their home countries. It is axiomatic that this kind of investment is for a longer term and is more likely to create jobs and impact the local economy. A major condition that would encourage foreign direct investment would include political stability, ease of doing business, exchange rate stability and ability to transfer dividends and profit without let nor hindrance.

Usually, Foreign Investment is part of what makes up the foreign reserve of the country. Recently, our foreign reserves have been declining from close to $50 billion to around $38 billion by the end of 2019. The major reason for this is the liquidation of foreign investment. Like we observed earlier, the component of foreign investment that is most affected is the foreign portfolio investment as that is the one that is most liquid. This is the so called, ‘Hot Money’. In spite of its volatility, we seem to continue to push to replace the fleeing foreign investment. We had argued in this column that other than bragging rights, there is just so much of foreign reserves that we are required to keep. Once we have reserves to cover 3 to 6 months of imports, that should suffice, according to economists. We had also argued that holding so much as reserves in the face of inadequate and decaying infrastructure, and mounting debts, makes no sense. We had demonstrated that the interest rate that we receive on our reserves is a little fraction of the interest rate we pay on loans. Based on the above position, we should actually be actively discouraging Foreign Portfolio Investment (Hot Money) in favour of the more stable and longer-term Foreign Direct Investment. At this point it won’t be out of place to ask if we really need foreign investment at all and if we do, how much of it do we need and at what cost?

There is no doubt that in a globalised world, many economies can hardly do without foreign investment, given the economic theories of division of labour, specialisation and trade. There is no country in the world that produces all that it needs and all must therefore depend on others who have comparative advantage in producing what it does not produce and therefore, trade is encouraged. For Nigeria as a developing country, there is also an advantage of new technology, new skills, expansion in capacity and general economic growth that goes with foreign investment. Having said these, it is instructive to note that foreign capital behaves like domestic capital in several ways. It goes to those places where it can make maximum profit. It does not go to places where it feels threatened. It avoids locations that have not prepared themselves to receive it. Preparation may include enabling laws, security, infrastructure and markets. Some of the things not listed here are sloganeering, preaching and representation. Foreign Capital is very smart. In fact, it is smarter than those looking for it. It has a way of decoding lies. It does not need to visit nor does it require you to visit for it to assess your state of preparedness to receive it. With the advent of the information super highway, it accesses relevant information at the speed of light. Foreign Capital is not shy to vote with its feet if it senses danger or if it feels that the host country is about to do something stupid, even if it has to lose money in the process. If it has to take flight, it explains it as cutting its losses. If these are true of Foreign Direct Investment, they are even truer of Foreign Portfolio Investment whose stake is usually smaller and its risk appetite, extremely low.

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It is in this light that we believe that it is high time we put on our thinking caps and begin to do things a bit differently. The first thing we should be doing is to aggressively begin to push Domestic Investment. We are known as the largest economy in Africa on the basis of GDP size. When looked at from the more relevant GDP per head, we pale into insignificance in the continent. The major reason for this is that our productivity is abysmally low. The only way to push this up is to improve economic activity. Improving economic activity requires investment in the economy. The best people to invest in a country are its nationals who understand the economy and its risks. Our suggestion is that we must do all that is necessary to encourage locals to invest in the economy. This is the case with the other economies that are doing well. China’s foreign direct investments are led by capital from Chinese who live abroad and desire to invest in the country. The same goes for India, Israel, Korea and so on. A lot of rich Nigerians maintain fat account balances abroad, that earn next to nothing in interest income. When you engage some of these our compatriots in this category, like yours truly had done in the past, you will discover that their major fears are maintaining a store of value for their assets. This is because the foreign currencies, in which they keep their money, are more stable in terms of exchange rates, and there is the ever-present fear of devaluation of the Naira. Obviously, some of the monies were not made legitimately and therefore are kept abroad, away from the prying eyes of the law. And there is a whole lot of such funds out there. What, one may ask, can be done about this? Some analysts and commentators have recommended amnesty to those hiding funds abroad to encourage them to repatriate such funds for local investments. In its publication released towards the end of last year, The Economist wrote that an estimated $582 billion had been stolen from Nigeria’s public treasury since Independence in1960. This humongous figure, if correct, exceeds our GDP. If we can target repatriating just 10% of this figure, our foreign reserve would more than double. So, it makes sense to do all we can to bring such monies and other funds, back into the economy.

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There are a lot of Nigerian investors living abroad and/or that have significant investments abroad. It is a sad fact that the system we have chosen for ourselves, has continued to drive our people out of the country. Most of them resident abroad have huge investments out there and do not give a thought about bringing back their money to Nigeria. We need to address their fears and create the necessary environment to attract such investments. I have no doubt that some people will be talking about patriotism and nationalism. Again, investments do not respond to such emotional arguments. We must behave in a way that is attractive to Capital. While we salute a few Nigerians, who continue to invest in the country, we must point out that they are too few to make the required impact. Why do we think that Ogun State born Mr. Bayo Ogunlesi, the acclaimed investment banker and lawyer, whose net worth is put at over $10 billion dollars acquired 3 airports, Gatwick, London City and Edinburgh Airports, all in the United Kingdom? Why wouldn’t he buy the Lagos or Abuja airports, assuming they were up for sale? Of course, there are many other Bayo Ogunlesis scattered all over the globe. Can someone take it up as a duty to engage them and hear from them? Maybe we can learn a thing or two from them.

A major condition for attracting investments is good governance. We must pay serious attention to rule of law, security, infrastructure, healthcare and education amongst other issues. It is only when we can take most of those for granted that we can thump our chest and proclaim that we are open for business. Therefore, the next time your leaders tell you that they are traveling abroad on roadshows and in search of foreign investment, do not forget to advise them that they should abort the trip to Sokoto when what they are looking for is in their ‘Sokoto’.

OUTSIDE THE BOX: By Alex Otti; alex.otti@thisdaylive.com

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