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Financing Investment For Growth – The Nigeria Experience


FINANCING INVESTMENT FOR GROWTH – THE NIGERIA EXPERIENCE

Introduction

One of the cardinal economic objectives of the developing countries, including Nigeria is to achieve high economic growth that will lead to rapid economic development and reduce poverty. From whatever theoretical angle that one may look at it, economic growth indicates the ability of an economy to increase production of goods and services with the stock of capital and other factors of accumulation, with the right combination of other factors of production will bring about their higher output growth. Economic growth is theoretically and empirically established  to be dependent on capital accumulation or investment. Investment in a broad sense refers to both investment in machines and human capital in the form of quality education and training. The controversy as to whether an economy may increase economic growth without experiencing any increase investment without economic growth has been traced to the classification or categorization of investment. Capital accumulation without the appropriate human capital as well as other supporting factors like good macroeconomic environment and policy may not result in economic growth. Also an economy may experience economic growth without any visible increase in investment if it has idle or unutilized capacity which it now utilized to increase output.

Chenery and Strout (1966) have established the positive relationship between investment and economic growth, using investment-income ratio as the explanatory variable. Iyoha (1998), using the same parameters was able to analyze the impact of investment on growth in Nigeria. Using data for the 1970-94 period, Iyoha found that 10 percent rise in the investment – income will trigger a 3 percent increase in per capita gross national product (GDP) in the short run. He also found that, in the long-run, a 10 percent increase in the investment-income will induce a 25 percent increase in per capita GNP. With these findings he concluded that per capita GNP is highly investment elastic in Nigeria. For government to achieve its desired objective of high economic growth and rapid development, it must pursue policies that will increase both the public and private investment. Aggregate investment in any economy comprises both the public and private investment. Although the prime motive of the public sector investment may be different from that of the private sector, they both face the same challenges in financing their investment requirements.

The public sector or government collects revenue from taxes and non-tax sources in order to meet its consumption and investment requirements. Government’s assumption experiment consist of employees’ compensation as well as purchases of goods and services. After meeting its consumption expenditure, the remaining revenue (if any) is used to increase the level of capital stock in the economy in terms of capital formation. In most cases, government expenditure requirement for capital accumulation is higher than its savings. The savings investment gap is then financed from the savings of other sectors either domestic or external to the economy.

The private sector also uses its income to pay for goods and services produced by other sectors of the economy and invest in capital accumulation in order to enhance production in future. If its savings, after taking care of its consumption expenditure, is not enough to meet its investment expenditure requirement, it has to borrow from other sectors of the sectors of the economy to close its saving-investment gap. The Nigerian economy, like any other, is made up of the public and the private sectors that engage in consumption, saving and investment activities albeit for different motives. While the private sectors is pre-occupied with profit maximization, the public sector is pre-occupied with economic development, welfare improvement, employment generation and poverty reduction.

The need for both the private and public sectors of the Nigeria economy to save in order to be able to increase investment was clearly demonstrated by Obadan and Odusola (2001). Using the Granger Casuality Test on Nigeria data, they tested the casual relationships between savings and income growth, savings and investment and investment and growth. They came out with these findings: (i) savings is not income-induced in Nigeria i.e. higher income does not lead to higher savings. Savings does not also Granger cause income. Their findings do not show any viral relationship between savings and income growth. (ii) investment is savings-constrained but not vice-versa. That is, low savings leads to low investment or higher savings will lead to higher investment but higher investment does not lead to higher savings in Nigeria. High investment is expected to lead to high production of goods and services and, holding other factors constant, higher income of factors of production, especially profits. The authors, opined that the lack of casual relationship between investment and savings, (i.e. investment does not Granger cause savings), is a reflection of the high propensity of cooperate bodies and individuals in Nigeria to consume rather than to save. Experience has shown that when profits cooperate bodies increase, the tendency is to increase employees’ emoluments and declare high dividend payment rather than increase investment. The same is equally applicable to the public sector. Windfall gains in revenue are not saved but assumed; and (iii) there is a unidirectional relationship between investment and economic growth. This finding confirm the finding of Iyoha’s study on the same matter and therefore gives credence to the important role of investment in the growth process. Having recognized the role of investment in economic growth in Nigeria, it is important for government to adopt policies and strategies that will ensure a stable macroeconomic environment that is conducive for sustainable investment planning and rapid capital accumulation.

High and sustainable investment in Nigeria calls for high domestic savings in both the public and private sectors. The bulk of the savings needed for investment in Nigeria has to come from domestic savings. The roles of financial markets, as well as, government macroeconomic policies and implementation are crucial in realizing the desired objectives of the high rate of domestic savings and investment for economic growth. While domestic savings for investment is of utmost importance, it is realized that foreign resources are needed to complement the domestic ones in order to enhance efficiency and transfer of modern technology and managerial skills to the Nigerian economy. In this regard, both foreign indirect investment (FDI) are needed for the required investment and economic growth in Nigeria.

The focus of this chapter is to identify the sources of funds for the both private and public sectors in Nigeria in meeting their investment expenditure requirements. This chapter is structured as follows: Following this introduction, the domestic and external sources of investment funds for the Nigerian economy are identified and discussed in section II, with emphasis on the major sectors of the economy. The factors constraining investment in Nigeria are highlighted in section IV while section V contains some policy prescriptions to eliminate or reduce the limiting factors to rapid investment and by extension economic growth in Nigeria. The section also concludes the chapter.

Sources of Investment Finance in Nigeria

The link between savings and investment, and between investment and growth have been theoretically established. As Tella (1998) pointed out, the work of Harrod and Domar in this regard is very instructive. According to him, the ratio of savings to capital-output ratio (i.e. incremental capital-output ratio, ICOR) determined economics growth. This relationship is expressed as follows:

g=s/r, where ‘g’ is the economic growth rate, ‘s’ is the saving rate, and ‘r’ is the ICOR of a given unit of capital. The Harrod-Domar growth model was improved upon by Tobin (1965) by introducing money into the model through effects of real disposal income on consumption and investment. In any economy, disposal income is either spent on consumer goods and services, or saved. A fall in level of income spent on consumption, all other things held constant, and leads to increase in savings. The policy implication of this inverse relationship between savings and consumption of the disposal national income is very important. If aggregate consumption level is falling as a result of increasing level of aggregate savings, production will have to introduce policies that will stimulate effective demand in order to bring about increase in production and employment of factors of production. If on the other hand, aggregate savings is falling because aggregate consumption is rising, holding the level of national income constant, Tella investment will eventually decline as loanable funds become scarce (998). Again government will be compelled to introduce policies that will encourage savings. The major source of funds for investment in any economy, therefore, is the aggregate savings of other economies, which can come in the forms of loans, grants, indirect investment and foreign direct investment. In broad terms, there are two sources of investment finance to an economy: domestic and foreign savings. These are discussed in details in this section.

Domestic Sources of Finance

The Nigerian economy, like any other, comprises the public and private sectors and both engage in investment expenditures. Both sectors have to save and/or borrow in order to meet their investment requirements. The immediate source of funds for requirement is own savings. As mentioned earlier, the government, which represent the public sector, collects revenue from both tax and non-tax sources.

After meeting its expenditure requirements on purchases of goods and services, the government uses whatever surplus to increase its stock of capital i.e. investment. This is also true of economic agents in the private sector. When investment expenditure exceeds the level of savings, the private and the public sectors mainly borrow from financial institutions. The financial institutions that actively engage in providing funds or credit for investment in Nigeria include deposit money banks (DMBs), mortgage institutions, and development finance institutions. Other sources include the non-bank financial institutions like the insurance companies, the capital market, mutual trust funds, pension funds, equipment leasing companies, cooperatives and thrift societies, etc. all these are regarded as formal sources of investment finance in Nigeria because they are well organized with appropriate records and, their operations are relatively open and regulated. Altogether, they provide the largest portion of the domestic funds for investment.

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There are a large number of informal providers of domestic funds for investment in Nigeria. They are termed informal because of their mode of operations and for lack of enough documented information about them. They provide investment funds for individuals and small enterprise operating in the formal sector of the economy. Because of lack of information on their operations, it is difficult to know precisely the proportion of the total domestic funds for investment made available by so-called informal providers of funds. However, for a country like Nigeria whose informal sectors is adjudged to be large, the informal providers of investible funds are playing a significant role in the process of capital accumulation in the country. The informal providers of investment funds in Nigeria include individuals, groups, town unions, occupational groups, “esusu”, religious organization, etc.

External Sources of Investment Finance

The other major source of investment finance for the public and private sectors in Nigeria is the foreign savings of other countries. Foreign savings of other countries can be assessed through borrowing (loans), grants, and equity participation. Both sectors may borrow from abroad, receive grants and gifts, borrow indirectly through the capital market and/or allowing foreigners to participate directly in the Nigerian economy through foreign direct investment.

The multi-lateral oragnisations such as the World Bank, International Development Association (IDA), African Development Bank (ADB), United Nations Development Programme (UNDP), etc. play significant roles in providing funds for investment purposes in Nigeria, either as a project loans provided by IDA for boosting that sector. Nigeria’s public sector has benefited from grants or soft loans provided by foreign governments or economic blocs like the European Union (EU) for investment purposes. Other forms of finance are forewing indirect investment, which is most desirable because it does not only facilitate transfer of financial resources for investment in the domestic economy, it also enhances acquisitions of modern technology, managerial skills, and efficiency in production and distribution.

Trend in sources of investment Finance

The sources of investment finance have been categorized into two namely; domestic and external. To analyze their trend, we shall be discussing the funds made available for investment purposes by the DMBs, Capital Market and FDI. The choice of these two sources was informed by the realization that they provide the bulk of investment finance from domestic and external sources. Again, information about the quantum of funds sourced through them is readily available.

Deposit Money Banks

The trend sectorial distribution of DMBs loans and advances for investment in the Nigeria economy at various periods from 1976 to 2000 and their percentage shares of the gross fixed capital formation during the periods. Between 1976 and 1980, the gross fixed capital formation amo8nted to N99.2 billion, out of which DMBs provided N31.4 billion or 3.6 percent. Grossed fixed capital formation rose to N192.0 billion during the period 1981-1985. The aggregate loans and advances of the DMBs also rose both in absolute and relative terms to N63.6 billion and 33.1 percent, respectively.

During the 1986-90 and 1991-95 periods, gross fixed capital formation capital formation increased by 129.4 and 36.4 percent over their levels in the preceding periods to N440.5 billion and N2,045.7 billion respectively. Similarly, DMBs’ loans and advances increased by 102.5 and 74.1 percent to N110.7 billion and N238.7 billion during the 1986-90 periods but their relatives shares of the aggregate gross fixed capital formation declined to 25.1 and 11.7 percent, respectively. The period 1996-2000 witnessed a boost in the gross fixed capital formation and DMBs’ loans and advances to the economy. Gross fixed capital formation increased to N11,631.8 billion while DMBs loans and advances amounted to N1,697.2 billion during the period. In relative terms, DMBs loans and advances represented 14.6 percent gross capital formation during 1996-2000, compared with 11.7 percent during the preceding period.

Sectorial Distribution of DMBs Loans and Advance

The sectorial distribution of DMB’s loans and advances is shown in the table 3.2. The data covering 1970 to 2000 period, is grouped into 6 sub-periods of five years each. The sectors are: production comprising agriculture, forestry and fishery; manufacturing; mining and quarrying; and construction; and general commerce, consisting of bills discounted, domestic trade; exports, and imports. Others are services, comprising public utilities; transport and communications; and credit too financial institutions; and “Others”, consisting of government, personal and professional and miscellaneous.

The share of DMBs’ total loans and advances to the productive sector increased steadily from 37.5 per cent during the 1970-74 period to 58.5 per cent during the 1980-84 period and peaked at 69.4 per cent during the 1990-94 period before declining to 48.8 per cent during the 1995-2000 period. The trend indicates that DMBs were reluctant to extend loans and advances  to the agricultural and manufacturing sub-sectors of the economy, especially during the era of deregulation of banks’ credit. The steady growth in DMBs’ loans and advances to the productive sector between 1970 and part of the early 1990s reflected the direct control policies pursued by the monetary authorities which made credit allocations by banks to the productive sector mandatory.

The proportions of DMBs’ loans and advances declined steadily from 37.5 percent during the 1970-74 period to 16.8 percent during the 1980-84 period. They increased marginally to 18.0 percent during the 1985-89 period, declined marginally to 17.1 percent during the 1990-94 period and then 1985-89 period dropped sharply to 7.9 percent between 1994-2000. In absolute terms, the share of general commerce in DMBs’ loans and advances showed relatively low amounts of N1.2 billion during the 1970-74 period but increased by more than 100 folds from the level in the preceding period to N3.4 billion between 1975 and 1979. The share increased by over 100 percent again between 1980 and 1984, and during the 1985-89 period. From N15.7 billion during the 1985-1989 period, the share increased sharply to N39.7 billion during the 1990-1994 period and jumped to all-time high of N142.6 billion during the 2000 period. Although the relative share of general commerce declined during the review period, the absolute amounts allocated to that sub-sector were quite significant.

DMBs’ loans and advances to services sub-sector exhibited a steady growth; rising from 0.3 percent in the early 1970s 11.1 percent in the early 1990s. data were not available for the 1995-2000 period, but given the tremendous increase in telecommunication and other information and communication services, the share of that sub-sector must have increased quite significantly. The trend alos supported the theory that as an economy develops, the services sub-sector, including the financial services, takes the from seat in driving economic growth.

Between the 1970-74 and the 1980-84 periods, the share of DMBs’ loans and advances to “Others” trended down from 15.6 percent to 10.9 percent during the period 1980-84. It increased marginally to 11.4 percent during the 1985-89 period before declining to an all-time low of 8.7 percent in the 1990-94 period.

Between 1995 and 2000 however, the share of “Others” in DMBs loans and advances rose significantly to 43.3 percent. While we recognize that there could be error in the classification of loans and advances, especially between “services” and “others”, it is very instructive to note that allocations of loans and advances to miscellaneous items witnessed a steady increase throughout 1970-2000 period. The claims of DMBs on government also showed an upward trend up to 1993 when data was available. Loans and advances to individuals and professional bodies did not show any clear trend for lack of data in some years especially in the 1980s.

Capital Market

The capital market has become a variable source of investment finance in the last decade. The growing important of this source of fund reflected the adverse market condition of pricing inefficiencies in the credit market, which led to the prohibitive interest rate in a loanable funds market. Consequently, companies resorted to equity funds, which are usually cheaper and do not carry obligatory repayment terms. The contribution of capital market to investment finance in any period is measured in terms of the amount of fresh funds raised through new issues rather than volume of transaction or market capitalization. New issues can be through Initial Public offers, Right offers, Bonds and Offer for Sale.

The volume of fresh funds raised in new issues by companies grew significantly in the last decade, rising from 1.5 billion in 1990 to 7.08 billion in 1995. It had risen steadily since 1998, from 17.28 billion to 67.32 billion in 2002 sharply to 185.0 billion in 2003. The sharp increase in new issues in 2003 was as a result of the issuance of 150.0 billion worth of bonds by the federal government, out of which 72.5 billion was subscribed. In the five-year period 1998-2002, the average fresh funds raised in new issues was 41.8 billion. On average, offer for sale at 31.4 percent of total new issues, represented the most important source of investment funds in the capital market. Offer for Sale and Rights Issues together, constituted 52.0 percent of total issues on average in the same period.

On cumulative basis, New Issues grew steadily from 1.2 billion in 1990 to 65.6 billion in 1998. By 2002, it had increased to 257.2 billion and stood at 442.2 billion 2003. Despite its growing importance as a source of investment finance. As a ratio of GDP, new funds raised in new issues maintained an average 4.0 percent in the period 1990-1997. This ration rose to 1.0 percent in the five-year period 1998-2002 and stood at 1.2 percent and 2.6 percent respectively, in 2002 and 2003.

Structure of Investment

At the macroeconomic level, investment expenditure in Nigeria in terms of financing is structured into domestic and foreign segment depending on sources of finance and to a lesser extent, management. At the domestic level, investment is further categorized in8to public and private sector investment expenditures. Foreign investment is further divided into foreign direct and portfolio investments, whether such expenditure is financed by private or official sources of capital. Investment could also be evaluated from the sectorial distribution point of view, in which case, each group of activity sectors of the Gross Domestic Product (GDP) is examined to measure the quantum investment expenditure received over time. In this categorization, the structure of investment or gross capital formation is composed of building and construction; land development; transport; machinery; and equipment; and breading stocks.

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As presented in table 3.4 building and construction dominated gross capital formation with over 60.0 percent share of the economy’s investment expenditure from 1970 to 2002. The lowest being 60.4 percent in the 1990-1994 sub-period while the highest share  of 76.9 percent was recorded during 1986-189 sub-period. Given the policies of industrialization, housing development; massive road network; sea and airport development; and development of a new Federal Capital in Abuja, the prime position occupied by building and construction in aggregate investment in the review period was not farfetched. Next in order of importance, was machinery and equipment component which registered between 16.8 and 19.2 percent between 1970-74 and 1990-94 periods, before decelerating to 9.8 and 6.9 percent in 1995-1999 and 2000 sub-periods. This scenario is understandable, given that the fact that capital goods are required for building construction

The declining trend in its share of gross capital formation would be attributable to increasing stock level over the years as well as increasing  cst of procurement, owing the declining  value of the domestic currency. Whichever the reason for the decline in relative share, there is need increase investment in this category of investment expenditure in absolute terms if the productive capacity of the economy is to expand.

The relatively small size of investment in transport in gross capital formation vis-à-vis the geographical size and population of the country and the large contribution of the service sector to the GDP, calls for concern. Land development and breading stocks’ shares in total investment were unattractive which ranged from 1.6 to 13.8 percent and 0.0 to 0.5 percent, respectively in the reviewed period. While the share of land development improved and recorded 13.8 percent in the 2000-2002 sub-period, that of breading stocks was very marginal with the highest share of 0.6 percent in gross capital formation between 1986 and 1989. This situation was attributed tot the peasantry nature of agriculture activity in Nigeria, which incorporates a high proportion of informal activities  that are unrecorded. The relative contribution of each of the structural components of gross capital formation to the GDP followed closely each components’ relative share in aggregate investment expenditure. For instance, building and construction which took the lion share in gross capital  formation made the highest contribution to the GDP while breeding stocks made no appreciable contribution in the review period. (Table 3.5).

Trends of Investment in Nigeria Economy

With a population of over 125 million people as at 2003, vast mineral resources, and favourable climatic and vegetational features, Nigeria has the largest domestic market in sub-Saharan Africa. The domestic market is high and potentially attractive to domestic and foreign investment, as attested by portfolio investment inflow of over N1.0 trillion into Nigeria though the Nigeria Stock Exchange (NSE) in 2003 (CBN 2003). Investment outcome, however has not been encouraging which was a reflection of the sub-optimal operating environment largely resulting from inappropriate policy initiatives. Except for some years prior to the introduction of the Structural Adjustment Programme (SAP) in 1986, gross capital formation as a proportion of the GDP was dismally low on annual basis. From table 3.6, it can be observed that aggregate investment expenditure as a share of GDP grew from 16.9 in 1970 to a peak of 29.7 in 1976  before declining to all-time low of 7.7 percent in 1994. Beginning from 1995, investment/GDP ratio declined significantly to 5.8 and increased marginally to 6.99 percent in 1997 and remained there about till 2001when 6.95 percent was recorded. On the average, about four-fifth of the Nigeria’s national was consumed annually. In comparison with both slow and fast growing economies, Nigeria’s investment ratio lags behind the required minimum level of an average of about 20.0 per cent of GDP annually that propelled the growth rate of those economies (World Bank, 1996). For instance, in the South East Asian countries, investment/GDP ratio is about 35 percent in Singapore; 38 percent in Korea, and 41 percent each in Malaysia and Thailand. Chile and South America register 28 percent (World Bank 1998). This explains the low rate of the Nigerian economy which closely followed the pattern of the growth of investment in Nigeria.

The sub-optimal performance of gross formation could be traced to many factors including persistence inflationary pleasure, low level of domestic savings, inadequate physical and social infrastructure, fiscal and monetary policy slippages, low level of indigenous technology as well as political instability. The issue of monetary (interest rate) policy calls for special mentioning. The interest rate deregulation in 1993, which was aimed at enhancing efficient resource allocation through competition, eventually led to rapid increase in lending rates, which made debt-financed investment unattractive. Another major factor was exchange rate control policy. The high lending rate, low and unstable exchange rate of the domestic currency and the high rate of inflammation made returns on investment to be negative in some cases and discouraged investment, especially when financed with loans.

The national savings-investment gap that existed in the Nigeria Economy is shown in the table 3.7. Domestic savings fell short of gross investment for most part of the period prior to the introduction of SAP in 1986, indicating foreign supplements. This was due to a conducive investment climate, characterized by relatively stable macroeconomic indicators such as exchange, interest and inflation rates. Following the economic deregulation 1986, the national saving-investment gap turned positive for most of the period, showing that less investment was received only four out of the fifteen years between 1987 and 2001. The factors responsible for this scenario included volatility on key financial and economic indicators such as exchange and inflation rates, which constrained investment owing to unstable business climate. On the aggregate, national savings-investment gap was negative for about fifteen years between 1975 and 2001, indicating foreign capital supplement either in the form of equity, aid-in-grant or debt capital at both private and official levels.

Foreign Investment in Nigeria

Nigeria’s economic climate was not able to attract foreign investment to its fullest potentials, giving the precarious operating environment which also limited domestic investment as mentioned earlier. In spite of vast investment opportunities in agriculture, industry, oil and gas, commerce and infrastructure, to mention a few, very little foreign investment capital was attracted when compared with other countries and religions competing for global investment capital. Owing to the unattractiveness of the Nigerian Climate, characterized by high production cost; inadequate infrastructure, financial sector distress; pervasive corruption; high rate of crime, spiraling inflation; political instability; and macroeconomic imbalance, limited foreign resources came into Nigeria, either in the form of foreign direct or portfolio investments or through official sources such as aid-in-grant. For instance, cumulative foreign private investment received by the economy, which was N 1.0 billion in 1970, reached N 3.6 billion and finally reached N 157.5 and N 161.4 billion in 200 and 2001, respectively (Table 3.8). Although the amount seems appreciable when expressed in the domestic currency (the Naira), caution must be however, exercised in using the figure especially when it is realized that the exchange rate of the Naira suffered massive depression from 1986 to 2002.

Analysis of activity sectors that benefited from private investment indicated that mining and quarrying; manufacturing and processing; and trading and business services received the highest amount in descending order of importance. These were followed by building and construction; agriculture, forestry and fisheries; and transport and communication during the  review period.

 

Investment and Economic Growth in Nigeria

Positive relationship between investment and economic growth has been established theoretically and empirically in the literature through the combined effect of accelerator and multiplier forces. However, it ha also been established that capital accumulation without the appropriate human capital, policies and a conducive macroeconomic environment may not lead to economic growth. On the other hand, an economy could experience growth without any visible increase in investment due to the usage of idle capacity to increase input.

The Nigerian data was analysed using the correlation technique to establish the relationship between investment and growth. The result showed a weak relationship between capital information and economic growth. For instance, between 1971 and 1980, the average correlation co-efficient between investment and economic growth was 0.11. This indicated that though there existed a positive relationship between the two variables, it was very weak. Indeed during the period 1981 to 1986, investment and economic growth moved in opposite directions with a negative co-efficient of 0.22. this was not unexpected given that investment declined in four out of the six years (1981-1986).

Data for the SAP and Post-SAP period of 1987 to 2001 indicated that the relationship between investment and economic growth was positive, with a correlation co-efficient of 0.30. Overall, the picture revealed a positive relationship between investment and growth, but with a very low average correlation co-efficient of 0.12 (Table 3.9)

From the result, it can be deduced that gross capital information has positive but very low influence on growth in Nigeria. This was not surprising giving the relatively low ratio of investment/GDP (Table 3.6). The World Bank (1996) put the required minimum ratio at 20 percent. It would appear that investment would have higher positive impact on growth in Nigeria only when the quantum is beyond the critical threshold. In addition, the lack of strong relationship between investment and growth could be attributable to the absence of other co-operant factors mentioned earlier which scuttled the translation of investment growth.

Factors Constraining Investment in Nigeria

Investment has been identified as a major factor in economic growth and by extension high rate of employment, productivity, human capital formation, improved technology and poverty reduction. Investment growth requires policies that enhance domestic savings, domestic and foreign direct investment (FDI). However, Nigeria and other African countries have failed to creat the enabling environment that would encourage both domestic and foreign direct investment in sufficient quantities capable of bringing about rapid economic growth and development. A number of factors constraining in Nigeria include:

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Inadequate macroeconomic framework and policy inconsistencies: Although Nigeria had implemented policies that were based on IMF/WB structural adjustment framework, it has not succeeded in attracting sufficient investment that will launch it to high economic growth. As part of its fiscal stabilization policies, the government usually cut its expenditure. The private sector most often withholds its investment in a situation of rapid changes in policies, given the fact that some investment are irresistible.
Low level of domestic savings: Domestic savings have been inadequate  to fund the economy’s growth potentials. Gross Domestic Savings (GNS) has consistently declined, since the introduction of the Structural Adjustment Programme (SAP) in 1986. The ratio of savings to GDP has also been on the decline resulting from the decline in real income; high incidence of poverty; low nominal disposable income, unfavourable economic environment; high unemployment; and inflation.
Poor infrastructure: Economic and social infrastructures are poorly developed in Nigeria. with the introduction of structural reforms in the mid 1980s, the situation deteriorated as the government, which is the major provider of these goods could not cope due to decline in real income. The role of the private sector in the provision of the basic infrastructure has been insignificant. Thus, both domestic and foreign investors are wary of investing in countries where basic requirement such as roads, utilities and health services are inadequate. Most often, industries have to provide their own back-up generators, access roads and medical care and other essential services, which increase cost of investment.
Low returns on investment: Due to high cost of production, it is often more profitable to import finished goods than to produce them locally. The problem of high cost of production emanates directly or indirectly from macroeconomic instability, erratic fiscal, monetary and exchange rate policies, coupled with weakness in financial system. Macroeconomic instability manifests in high inflation, and interest rates and a high degree of volatility in exchange rates. These problems create unfavourable investment climate as investors find it difficult to forecast their rate of returns.
Political instability: Political and social problems such as coups, human right abuses, inter-ethnic and religious disturbances, high rate of crime have generated a sense of insecurity of life and property in Nigeria with the perception of country riddled with crises and so not conducive for investment. Uncertainty and political arbitrariness, which are common in Nigeria, serve as deterrent to investments ; as investors always move their resources to where they are safe from economic and political disruption.
Slow rate of privatization: This has also been identified as a factor constraining investment in Nigeria. in contrast to many Latin America and Eastern European countries, which have used aggressive privatization to boost foreign direct investment, progress in privatizing state-owned enterprise in sub-Saharan Africa, Nigeria inclusive, has been slow and non-transparent. This has led to the loss of prospective investors.
Debt burden: The growth of domestic and external debt over the years has negatively affected and level of investment in Nigeria. while internal debt reduces incomes and savings, it variably cuts domestic investments. On the other hand, external debt service takes so much of a country’s export earnings and thus discourages foreign investments because investment are uncertain that the country would be able to authorize the remittance of profits or provide foreign exchange for necessary imports. Domestic investors are also discouraged because debt overhang distorts incentives to invest the benefits of good performance goes to the creditors. Investors may also face high taxation in such a situation in order for the government to service its debts.
Shortage of foreign exchange: Persistence shortage of foreign exchange and difficulties in foreign exchange transfers are also serious constrains facing investors in Nigeria. shortages of exchange rate means that spare parts and other inputs cannot be imported, which leads to plants being operated well below installed capacity. In this kind of situation, investment, in the real sector suffers a result of cost of production as well as deterioration in infrastructural facilities.
Other factors constraining investment in Nigeria are inefficient and sometime insufficient incentive package, inadequate legal system and regulatory framework, corruption and red-tapism.

Policy Recommendations

Considering Nigeria’s rich natural base and abundant human resources, the country could complete effectively in the global market. However, there is need for creation of an enabling environment for the country to achieve its full potential in terms of growth by generating  the required level of investments, both doestic and external. Other specific recommendations are:

Pursue strong macroeconomic policies: investment risks can be reduced in Nigeria through the achievement and maintenance of macroeconomic stability. This means that policies need to be designed to control inflation, achieve exchange rate stability and set interest rate at a realistic level. This will raise productivity and growth by achieving macroeconomic stability and stimulating private investment through the removal of distortions. Large budget deficits should also be avoided as they crowd out private investments because of high lending rates.
Improve economic efficiency: Ensuring domestic completion in all sectors of the economy will go along way in improving efficiency. This can be achieved by liberalizing trade and removing the state from direct involvement in the production of marketable goods and services. There is also need to liberalize the labour market to give investors the free hands to their workers in a cooperative environment. However, the labour law must not give room for the exploitation of workers.
Increase public investment towards human capital development: there should be a concerted policy to increase government spending on education and health. A functional educational system and adequate health service help to build an adequate human capital base, which in turn raises efficiency and productivity, a large pool of well educated and skilled labour force will attract investment into an economy, all things being equal;
Improve infrastructure: Good infrastructural networks such as roads, electricity, communication should be promoted by government by basic investment costs;
Contain corruption: Government war on corruption is highly desirable in order to abolish the country’s negative image and encourage investment in the country. Reduction in the level of corruption will reduce the cost of doing business in the country and improve investor confidence in the system.
Support and promote regional integration: Current efforts at sub-regional integration are another way of attracting investment. This is because regional integration contributes to trade liberalization, strong and collective macroeconomic policies and institutions that promote initiation and implantation of good policies. The existence of sub-regional marketers, as a result of interrogation, boost the level of trade and encouraged efficiency; enhance financial intermediation. The role in promoting productive investment and providing efficient services to investors. Banks should also give the desired attention to small savers; which had so far been ignored, as they constitute an important source of savings that can be channeled for investment purpose. Government on its part should encourage the use of financial institutions as payment channels; and
The roles of the public private sectors development should be clearly stated, so that the need to lay more emphasis on a private sector-driven economy does not deprive the public sector its role in creating an enabling environment or undertaking necessary investments, especially in education, healthcare provision and development of infrastructure.
REFRENCES

Ariyo, A. (1998) “investment and Nigeria’s Economic Growth: Reflections and Policy Issues”, Selected papers for the 1998 Annual Conference of the Nigerian Economic Society.

Bhattacharya, A. et al, (1997) How can sub-Saharan Africa Attract More Private Capital Inflows, IMF Publication Services, Washington D.C.

Bamidele, A. and England A. (1998) “Macroeconomic Environment, Investment Stimulation and Economic Growth and Development: The Nigerian Experience”, selected papers for the 1998 Annual Conference of the Nigerian Economic Society.

Chenery, H.B and Strout, A.M. (1996), Foreign Assistance and Economic Development American Review, September.

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