The ASSESSMENT OF THE DETERMINANTS OF INVESTMENT IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The Nigerian economy has witnessed a slow pace of growth of less than 5 percent in the last two decades. Various reasons have been advanced to this development but the most apparent has been the poor investment climate in the economy and this has been attributed to the low available investable funds.

The stimulation of sustained economic growth requires a balance investment in physical and financial assets human and social capital as well as natural and environmental capital.

Nigeria has been classified as low savings and even lower investment economy (Ajakaiye 2002) one of the principal objective of the Nigerian government under the 1999 democratic dispensation is fostering of sustained economic growth. Over the years the government has been in the driver’s seat in growth the economy. But lessons of experience have show that government cannot regulate the economy effectively. A typical example has been the shift under the National Economic Empowerment and Development Strategy (NEEDS) which has recommended the need to restructure and deepen the financial system. Some economists like Mckinnon and Shaw (1973) said that rising investment alone is not sufficient enough to bring about growth and the role of financial institutions is very vital. In particular, the view expresses that the role of capital fund is very critical to the success of any endeavor (World Bank 1998). In this regard, it is therefore important to investigate the determinants of investment in economy in the past three decades.

Growth of economies is derived from investment is such economy. A key role is assigned to investment as a propellant of economic growth. Investment in various sectors of the economy stimulate aggregate employment, output, demand income which also increase the government revenue for further provision of basic industrial and agricultural further provision of basic industrial and agricultural inputs for the growth and development of an economy. This entails that the investment multiplier increase national income which increases savings for investment, consumption and aggregate demand level. The effect will be the rising standard of living of the masses which is the major determent of growth and development in an economy.

Banking sub sector in Nigeria has remained foreign in rural areas. But recently the establishment of community banks (now micro finance banks) has been to deepen their operation in rural areas. These banks with government assistance give loans and mobilize savings from rural areas for further investment in Nigeria. In addition government have tried to provide necessary infrastructures in rural areas to help reduce the rate of rural – urban migration for the purpose of compelling the rural population to take agriculture to greater height as it was in past 38 years. However the diversification of the various sectors of the economy has been the main objective of the government. This is to increase employment which will increase income and savings for investment. But the process so far have not been adequate because of political instability and policy inconsistency which range from corruption of political administrators and negative effect of transitional government.

Diversification of different key sectors of the economy like agriculture and industry increases employment, incomes, consumption, savings, demand and generally, aggregate investment level that will broaden and deepen the society’s standard of living. But the dismissal growth record in most African countries relative to other regions of the world has been of concern of economists (World Bank, 1998).

This is because the growth rate registered in most African countries including Nigeria is often not commensurate with the level of investment.

In Nigeria for instance, the economy witnessed tremendous growth in the early and late 1970s, as a result of the oil boom.

This increased investment especially in the public sector. But with the collapse of the oil market prices in the early and mid 1980s, investment fill, thereby causing a fall in economic growth. For example during the investment boom, gross investment as a parentage of GDP was 16.8% and 31.4% in 1974 and 1976 respectively, where as it declined to 9.5 and 8.7 percent in 1984 and 1985 due to the depression.

Although the rise in oil prices during the 1990 – 1991 period was supposed to spark off an investment but that was not the case in Nigeria. The Nigerian Military government for instance was inexperienced in formulating economic policy and thus left that task to bureaucracy (Babalola and Idoko 1996). The unit was that investment decision which were undertaken with great decline, the government in 1986 adopted the IMF World Bank Structural Adjustment Programme (SAP) with a view to providing stable macroeconomic and investment environment.

To this end interest rate that were previously fixed and negative in real terms were replaced by an interest rate regime which is driven by the market forces.

The policy shift de-emphasized direct investment stimulation through low interest rate and encouraged savings mobilization by decontrolling interest rate (World Bank 1996). Consequently, the objective of enhanced investment and output growth was not realized as the country’s investment failed to rise to anything near the level it had reached in the 1970s.

Although successive government has implemented policies and strategies raising the level of savings and investment but these policies so far have been erratic as a result of recent changes in government induced by political instability.

In addition the experience of the east Asian countries suggests that an investment rate of between 20 and 25 percent could engender growth rate of between 7 and 8 percent. Statistical evidence reveal that output represented by the real GDP in Nigeria showed a positive growth soon after the civil war, following the oil boom of the 1970s such that growth rate stood at 21.3 percent in 1971 (Bage 2003. P. 17)

Therefore, for Nigeria to register increase in growth and development there is need to increase the tempo of private investment that would lead to higher growth as was the case in Asian countries.

Finally, an analysis of domestic investment require a simultaneous link to GDP as aggregating factor interest rate and other unique variables that react to fluctuations in investment, like debt ratio, business environment real exchange rate government expenditure and provision of infrastructures etc.

1.2 Statement of the Problems

Domestic Investment in Nigeria has been constrained by numerous factors.

These factors range from the followings

Low capital stock: investment can never be successful if the capital stock is low.

The poor level of capital stock has been as a result of poverty which decreases domestic savings resulting from decline in real per capital inadequate infrastructures, investment entrepreneurial activities is discouraged more by the absence of basic infrastructure like electricity, good road and communication (Green J. and D. Villanura (1991)).

Economic and Social Infrastructures are poorly developed in Nigeria. Thus domestic and foreign investors are wary of investing in countries where basic requirement are inadequate. Political instability and policy inconsistency. Due to the transitional nature of the Nigerian government investment have been derailed.

Interest rate move inversely with investment, that is, as interest rate increase, investment fall conversely, when interest rate is falling investment raises. But Nigeria interest rate of about 17.6% year ended 2006 did not account for upswing in private investment because of inappropriate administration and poverty.

The growth of domestic and external debt over the years has negatively affected the level of investment in Nigeria. Nigeria debt burden between 1977 – 2007 has effect for the economy and the welfare of the people. For example Nigeria was owing the international community as at end of 2007 was up to billion while its total external debt stock stood at 25.77 billion dollars (US), which could have been used for more allocation of basic requirement that would aggravate investment (Babalola and Idoko 1996).

Exchange rate fluctuation have also contributed to low propensity to invest in Nigeria by the foreigners. This is because of low manufacturing of export good capital which would have ordinarily increased domestic exchange rate (Jhingan M. L. 2005).

Therefore instead of investing domestically, the greater percentage of Nigerian’s prefer investing abroad where their money would be managed effectively.

High cost of raw materials and inadequate developed nature of domestic raw materials for investment. Therefore government should give incentives to encourage the investors given tax holding and reduction in duties charged during import of raw materials.

1.3 Research Questions

The study revolves around answering the following questions:

The relationship between national savings and investment.

Relationship between household consumption and investment.

The relationship between inflation rate and investment

1.4 Objectives of the Study

The objectives of the study will be to :

To determine the trend, character and profile of investment.

To determine the causal relationship between investment and real gross domestic production in Nigeria.

Recommend policy measures that will stimulate investment in Nigeria.

1.5 Statement of the Hypothesis

The research study will be conducted under the hypothesis frame work below :

Ho: the macro economics variables do not influence investment in

Nigeria.

Hi: the macro economics variables do influence investment in

Nigeria.

1.6 Significance of the Study

The importance of the study lies in the fact it will provide an insight into the relationship between investment and other core policy variables.

It will also further identify the reason why Nigeria’s investment efforts have not provided the desired results.

It is anticipated that this research work should be a source of reference to economic and social planners interested in the study of investment in Nigeria.

1.7 Scope /Limitation of the Study

The major limitation is the quality of date while public sector investment are easily obtained from budget estimates, there is no reliable control in case of private investment as the date series are questionable as it is derived residually the analysis are questionable as it is derived residually.

The analysis relied on data series from 1977 to 2007 the choice of time was informed by the availability of data and the desire to capture the periods of structural break control regime.