Inflation has constantly been on the increase, the most recent publication by NBS shows that Nigeria’s headline inflation hit a 17-year high at 20.52% showing a year-on-year increase of 3.52% and a month-on-month increase of 1.77%.
The rising inflation rate has in turn affected the purchasing power of consumers and also affected the Naira value. Long-term cash flows and fixed assets perform poorly when inflation is rising, thereby reducing the present value of future returns on investment.
Inflation hinders the prediction of the certainty of prices of goods and services in the future, and the uncertainty of future rates of inflation/prices of goods and services discourages potential investors and reduces the efficiency of investments.
Private Investment in Nigeria Contributed 11.2% of the Total GDP in 2022.
Private investments in Nigeria range from goods and services to bonds, assets, and bonds owned by private individuals. Private investment increases the rate of capital formation, increases production capacity, and training of labour, and overall, boosts the economy.
Nigeria has not recorded an increase in private investment as private investment has continued to decline from 2020 till date, a decline driven by the impact of COVID-19, economic recession, and majorly inflation. The decrease in private investment might lead to monopoly, lack of competitiveness, lower living standards due to lower remittances of households, and a less productive economy in the long run.
The decrease in private investment has an inverse relationship with inflation. The higher the inflation rate, the more interest rates are likely to rise because lenders will demand higher interest rates as compensation for the decrease in purchasing power of the money they are paid in the future. Changes in real interest rate affects the public’s demand for goods and services by modifying borrowing costs, exchange rates, availability of credit facilities and bank loans and living standards of households. All of which slows private investments.
Inflation also leads to credit market frictions due to the anticipation of banks to future inflationary pressures, further making banks hesitant in handing out loans. Indirectly hindering private investments from accessing loans and other credit facilities from banks.
High inflation undermines the returns investors get on fixed-income assets, the purchasing power of funds received will be decreased and reduces the return on money and assets which further leads to credit market frictions. On the flip side, when inflation is controlled, it leads to economic development through an increase in investment returns, higher profit for producers and a rise in production.
Mr Ojeikpo Michael agreed that there is a negative relationship between rising inflation and private investment. This is so because private investors operate on a fixed cash flow, so rising inflation will reduce the present value of its future fixed cash flows.
The Senior Planning Officer National Space Research and Development Agency (NASRDA) pointed out that most investors want to secure their future purchasing power, which rising inflation erodes. ‘You know the simple meaning of inflation is the continuous and persistent rise in the general price of goods and services over time. This carries a number of characteristics notable among them, that apply to private investment, are higher cost of borrowing and high-interest rates
Mr Robert Terkura Ananda, a Social Institutions Reform Advocate and Investment Banker said that a lot needs to be done to boost private investment in Nigeria. He said investors incur an extra cost in providing their power, transporting their products and services, and communicating with their partners. Mitigating these costs by providing power supply, transport, especially a railway system connecting industrial hubs and making telecommunication cheaper and dependable to reduce extra costs is important.
The Private Sector Institutions Strategy Analyst pointed out that government policies, especially with respect to interest rates, loans to private investors, and exchange rates affect private investment. While developed nations like the United States charge about 4% per annum, it’s about 25% in Nigeria.
“You obtain a loan of N80 million and end up paying N25 million in interest. And in addition to that, you provide your own power, transport at high rates and other expenses which discourage investment”, he pointed out.
Policies which are investment friendly – like low interest rates on loans, and the provision of infrastructure, will boost private investment in the country.
Adijat Kareem is a research and data analyst at Dataphyte with a background in Economics. She is passionate about data and storytelling in driving social change and innovation.
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