Nigeria’s foreign direct investment (FDI), which measures the interest of investors in an economy, has continued to fall, based on data published by the National Bureau of Statistics (NBS).
Details show that between Q1 2020 and Q4 2022, the country’s FDI fell by 60 percent, dropping from $214.3 million to $84.2 million.
Within this period, the FDI only increased in Q3 of 2022, Q4 of 2020 and Q4 of 2021.
Nigeria has recorded more portfolio investment than FDI.
Nigeria’s FDI figure rose to its highest level of $414.8 million in Q3 of 2020, comprising 28.3 percent of the total capital importation for the quarter.
Portfolio investments are investments in short-term financial assets such as stocks, treasury bills, among others, while FDI, which signals direct business interest in a country, involves putting money in long-term, real part of the economy. A typical example is setting up a factory.
Despite Nigeria’s huge incentives to investors, investments are yet to improve.
The Medium-term Expenditure Framework (MTEF) states explicitly that “tax incentives can be veritable instruments for driving economic development.”
In 2021, 16 companies were granted tax waivers under the Industrial Development Income Tax Act. The Federal Government justified its action on the companies’ contribution to the nation’s economy. In fact, the Nigerian government granted tax waivers and concessions to Dangote, Honeywell, among others, valued at over N16 trillion in three years.
Details of the tax expenditure as published in the MTEF of the government shows that a key component of the expenditure (Company Income Tax) has continued to record growth, yet it has failed to increase investor confidence or business commitment in the country.
Nigeria’s tax expenditure means forfeiting parts of the revenue from tax to support growth or investment.
A Dataphyte review of budget performance documents show that while Nigerian Customs Service made N1.2 trillion in 2021, it forfeited an equivalent 60 percent of its revenue in the year to tax expenditures.
Nigeria also gave away 26.6 percent of its revenue made in 2021 from company income tax (CIT) to CIT expenditures.
The country also had an equivalent of 7 percent of its real GDP in 2022 as a tax expenditure.
Already, the International Monetary Fund has questioned Nigeria’s tax expenditures which it says is high, noting that Nigeria should rather focus on tax reforms to achieve fiscal stability.
Experts told Dataphyte that the country’s high CIT might make investors lose interest in the country’s business landscape.
Dataphyte checked tax rates across different select countries using data from the Tax Foundation.
The results (as seen above) show that countries like South Africa, Ghana, Indonesia, China, United Kingdom offer lower CITs.
Tax expenditures not enough to drive foreign investment- Expert
The Director of Research and Strategy at Chapel Hill Denham, Mr Tajudeen Ibrahim, told Dataphyte that there was a need to think beyond tax incentives.
“There needs to be more than tax incentives to draw investment into the country. For instance, Nigeria has a poor ranking in ease of doing business. This is very concerning and will not encourage investment in the country’s business landscape,” he noted.
Ibrahim further said that Nigeria needed more key infrastructures, saying that lack of which often discouraged investors.
“Nigeria lacks the relevant infrastructure that can attract investors. An instance is the country’s power sector, access to good roads, rail transport, and other important infrastructural needs.”
He further opined that the instability of Nigeria’s foreign exchange was also cause for worry for investors, noting that Nigeria’s fx market lacked flexibility.
On the way forward, he advised that such tax incentives by the government be converted by benefitting organisations into infrastructural development, noting that this was one way Nigeria could benefit from its tax expenditures.
A financial market analyst, Ike Ibeabuchi, said Nigeria should focus more on improving its business environment to attract investments.
“The only way Nigeria can attract investors is by gaining their confidence. And that can only happen when you have stable policies, tax reforms, regular power supply, good dispute resolution mechanisms, stable polity, security, foreign exchange market reforms and a good justice system,” he said.
investment