GDP and FDI: Measuring the Performance of the EMT and CBN

Proshare

Friday, November 22, 2013 / By Project Research 

 

The importance of GDP growth and FDI inflow in any country’s developmental agenda cannot be undermined. Despite increased academic literature supporting the prioritization of other developmental indicators such as unemployment rate, literacy level, income inequality et al over GDP growth as measure of economic wealth and welfare; historical, theoretical and empherical evidence still provides that GDP growth is a prerequisite for economic development. By and large, GDP still remains the primary and most fundamental measure of economic performance while the size/share of FDI a country receives is a reflection of investors’ confidence in the economic health of a nation and the inherent potential possessed by such economy. The performances of these two fundamental indicators which to a certain extent reflect the economic health of a nation however is a function of the actions and inactions of economic managers and policy makers.

 

GDP and FDI: A measure of Economic Performance

GDP could simply be defined as the total value (in currency) of the goods and services produced in an economy over a period of time. It is often taken to mean the size of an economy and is one of the important variables economists, operators in the financial markets and the general public look out for in making economic decisions. FDI, as defined by the IMF refers to the net inflow of investments to acquire a lasting management interest of no less than 10% in an enterprise in an economy other than that of the investor. It defers from portfolio investment in that it is not short term but lasting investment, and sometimes involves transfer of knowledge and technology to the country receiving the inflow.

 

To stimulate growth and attract FDI inflow in the increasingly competitive world, domestic economic managers and policy makers must be able to ensure macroeconomic stability and provide a safe and conducive business climate capable of generating internal growth and attracting foreign direct investments. A growing economy devoid of uncertainties and socio-political and economic rigidities is a better positioned economy to attract FDI which is much needed in bringing capital goods and technical human resources to take advantage of the business opportunities and aid development in specific sectors of the economy. Thus, the challenge before policy makers and economic managers is to de-risk their economies and position it better to grow and attract long term investments.

 

GDP growth and FDI; a curse or a blessing

Many have considered FDI inflows into developing countries, especially in Africa as aggravating the resource curse problem. This is as the FDI inflow into the continent have been directed majorly to the exploitation of natural resources which, despite being the mainstay of their economy for long, have failed to propel them into the league of developed nations, even with positive growth figures and increase in revenue generated which the political elites have managed to squander on frivolities. The assessment is however only partly correct, the problem is not that FDI inflow have led to increased revenue potentials for the government but that the political elites and economic managers have irresponsibly failed to manage the revenue efficiently, albeit with the aid of their foreign collaborators.

 

The picture becomes clearer when this assessment is put vis-à-vis with an UNCTAD report that rated USA, China, Belgium, Hong Kong, Australia et al as countries that received the most FDI inflow in 2011. These are clearly not resource cursed nations, but developed nations and some in transition. The reason for the disparity in the resultant effect of FDI between both set of economies is that economic managers and policy makers in the latter category have been more responsible and proactive in creating enabling economic and business environment for sectors other than natural resource exploitation to thrive in their economy, which is now generating substantial FDI inflow and resulting in multiplier effects in the economy. In other words, their counterpart in the developing world have done less thorough job with this, which have resulted in stalled development in other potentially productive sectors where FDI would have been more productive and would have resulted in higher multiplier effects.

 

In Nigeria, the responsibility of developing ingenious economic policies, plans and programmes that will improve the business and economic environment and consequently stimulate growth and attract FDI inflows rests on the fiscal authorities at the federal, state and local levels; and the monetary authority, the Central Bank of Nigeria. In essence, the ability of the Nigerian economy to create positive business and economic environment that will stimulate GDP growth and attract FDI depends on the actions and inactions of the domestic policy makers, the CBN and fiscal governments and their organs.

 

In keeping with global best practices and to further enhance the capacity of the Federal Government to formulate and implement adequate policies, President Goodluck Jonathan in 2011 assembled a team of top government bureaucrats’ and businessmen to serve in the Nigeria Economic Management Team charged with the responsibility of supporting the administration in developing ingenious policies that will affects the lives of Nigerians and accelerate the pace of economic development. The President at the inauguration charged the NEMT to “combine their individual strengths, to generate ideas and initiatives in line with our goal of transforming every sector of the Nigerian life and society, particularly the economy and accelerating the pace of economic development

 

The responsibility of the NEMT, which is the central economic management body to an extent, aligns with those of the CBN who also seeks to advance the Nigerian life and economic society through its policies. The expectation of Nigerians was than both bodies will help transform their lives positively in their respective ways by creating a positive environment that will make them more productive.

 

Over two years after the establishment of the NEMT and much longer the CBN, Nigerians should be asking if the efforts of both bodies are paying off. We should be asking if the business and economic climate has been transformed to stimulate output growth and attract FDI which has the potential of developing the economy. We should be asking if the economy is now better positioned than it was two years ago. We should be asking if they are performing to expectations.



Nigeria’s real GDP growth rate has been slowing since the 8.36 peak recorded in 2010 Q4. The real GDP growth rate declined from 7.43 per cent in 2011 to 6.58 per cent in 2012 and further declined in 2013 Q1 and 2013 Q2. This, according to the NBS is partly due to the contracting oil and gas sector. The sector contracted 0.91% in 2012, declining further by 0.54% in 2013 QI and a worrisome 1.15% in 2013 Q2.

The oil and gas sector is traditionally the sector that attracts the most FDI inflow into the country. The sector attracts FDI from major IOC’s like Chevron, Mobil, Shell and countries like China and the United States. It is also an important sector that contributes a lot to the nations GDP, since activities in the sector produces the country’s most valuable output, crude oil. The sector directly and indirectly employs thousands of Nigerians and is the main source of fiscal revenue which the public sector dominated Nigerian economy relies on. This is why it should come as no surprise that the real GDP growth has been slowing since 2011 when the structural problems bedevilling the sector worsened. The sector has been witnessing increased volatility, mainly due to crude oil thefts that is affecting output volume and non-passage of controversial PIB which is creating uncertainty in the sector and stalling FDI inflow into the sector.



The Nigerian economy, though still remains the economy attracting the most FDI in Africa (about 15% of the region’s total) due its sheer market size and natural resource endowments. But with the challenges facing the oil and gas sector which has led to many oil majors, rather than investing, to be divesting stake in the sector to invest in other economies with better business and economic climate that are also competing with Nigeria for the increasingly scarce FDI needed to develop capital and technical human resource driven energy sector.

Other sectors of the economy such as the industrial manufacturing, agriculture and FMCG that should have been making up for the growth shortfall being recorded in the Oil and gas sector are not yet positioned to generate the kind of growth the Oil and gas sector has been providing Nigerian, nor are they able to attract the size of FDI inflow that is associated with the oil and gas sector. This is no thanks to the nation’s poor business and economic climate which is constraining the economy from reaching its GDP and FDI inflow potentials.

Factors such as poor public infrastructure/utility, multiple taxation, and widespread corruption, prohibitive cost of borrowing, uneducated and poorly skilled workforce, low labour productivity and the recent security challenges which have been left unaddressed by successive fiscal administrators and the CBN (where it applies) have all combined to stall the country from achieving its potential. These are essentially the problems the NEMT is expected to solve, but in contrast worsening. In what was a damning verdict passed on the country’s business climate, the World Bank rated the country 131st among 136 countries surveyed in its Ease of Doing Business index and placed the country at 120 out of 148 countries in global competitiveness; which is a reflection of the difficult business environment in the country that has been stifling real sector growth. As if those were not enough, the country was also rated 139th out of 176 countries in the Corruption Perception Index of Transparency International.

Some might consider the 6 to 8 percent being recorded in the country as acceptable and even take pride in the fact that the country is by far the largest recipient of FDI inflow in the continent. But the question is; with the abundant human and natural resources the nation possesses, are these figures truly reflective of the economic potential of Nigeria? Are they enough to lift the multitude living in poverty to middle income status the likes witnessed in Brazil and China the last two decades?

China, a country often described as a role model for other countries in the developing world grew at an astonishing double digit rates for several years before the country could attain its present status as a global industrial hub and economic giant. This was no mean fit; as it required wit and formidable political will. It took effective planning and formulation as well as detailed implementation of policies, plans and programmes by the economic managers for the country to reach its potential.

In the same vein, Nigeria’s economic potential is equally limitless. The country is not just one of the most resource rich in the world; its market size is also an asset which is now a burden since it is not yet being exploited. With this kind of potential; should we not be targeting double digit growth rate and competing with the likes of Brazil for FDI?

In reality, it might be too early to completely condemn the NEMT but their performance and that of the economy so far does not give one the confidence they will be able to deliver on their core mandate of, “transforming every sector of the Nigerian life and society, particularly the economy and accelerating the pace of economic development” as specified by Mr President.

The EMT as of now is yet to come up with any realistic broad based short and long term taxation policy, corruption fighting measures nor general economic industrialization plan with clearly defined targets and realistic means of implementation. The transformation agenda of 2011-2015 which is more of a short term plan is filled with unrealistic assumptions and targets and being half heartedly pursued with no clearly defined means of implementation. The agenda was bungled from the year of inception, as the baseline GDP growth of 11.7% assumed for the planning period (2011-2015) has so far been elusive, a fisherman’s mirage at best. The sectoral plans such as the power reforms and Agricultural Transformation Agenda are commendable efforts, but in as much as they are not integrally coordinated under an industrial development plan which is what the country needs, we might end up in a situation where a step will be taken forward in both sectors while two will be taken backwards in other sectors of the economy that will constitute drawback on the developmental agenda.

The much needed interaction/coordination between the CBN and the NEMT is also yet to be seen. The fiscal authorities are planning to start reducing deficit at a time when the CBN is also tightening monetary policy; no one needs to be told that this is not healthy for the economy. We had the Minister of Finance talking to the press some months ago on the need for the CBN to loosen its screw on the economy at the same time the CBN Governor was advocating for more contractionary monetary measures to shield the economy from volatility, even as both are in the NEMT which is supposed to be a higher level policy making government arm where issues like those could have been trashed out and other monetary and fiscal policies would have been aligned. The world has clearly gone beyond the age of treating monetary and fiscal policy in isolation. To stimulate the Japanese economy for example, we saw the Prime Minister, Shinzo Abe, and the BoJ boss, Haruhiko Kuroda working hand in hand to implement what was tagged Abenomics. The result of course has been astonishing; inflation is up for the first time in years and growth is rebounding. It is this kind of cooperation and communication between both arms that we are yet to see in Nigeria that is holding back the economy from reaching its potentials.

Finally, the composition of the current Economic Management Team assembled in 2011 makes it appear as if the team was formulated merely to creae an inclusive all-in platform rather than to form a hands-on bedrock for economic decisions; a point made clear in Proshare’s September 11, 2011 editorial -
The 28-man Un-Economic Management Team

You can take part in the “The next CBN governor; whom the cap fits?” discourse. Kindly send your contributions and comments to
info@proshareng.com.

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