In a 2019 Human Development Index1 (HDI) issued by the UNDP, countries with low human development include Liberia, Guinea Bissau, Sudan, Niger, Nigeria, Mauritania, Lesotho, Senegal, Togo etc. The Human Development Index is measured through three dimensions: long and healthy life, access to knowledge and decent standard of living. The major importance of the HDI is to enable countries to calculate the overall level of development and what sectors in the economy need more funding and attention. What this means is that countries with low HDI tend to suffer with high rate of unemployment, low Foreign Direct Investments (FDI), high mortality rate, poor infrastructures and so on. The key importance of the HDI is to drive economic diversification and economic growth. Beyond economic growth, it is also important to adopt development strategies that would solve the issue of social needs and increase inflow of investments.
A major reason Nigeria is ranked 158 amongst countries with low HDI is largely due to inconsistency in economic policies, national security challenges, high rate of poverty, unemployment, inequality and the 2017 recession that affected the country as a whole. Nigeria has slowly recovered from the recession in 2017 but fundamental developmental challenges such as poverty, inequality and unemployment remain high.
Based on the 2020 world investment report, FDI flows to Nigeria totaled US$3.3 billion in 2019, showing a 48.5% decrease compared to the previous year (US$6.4 billion in 2018) under austerity measures2. The total stock of the FDI was estimated to be US$98.6 billion in 2019. The United States, United Kingdom, France and the Netherlands are the main investing countries in Nigeria3.
The impact of the pandemic in the economy has conferred further stress on Nigeria’s budget thus exerting pressure on the low foreign reserve and poor debt profile. With limited wriggle room to borrow from external sources and capital flight due to reduction in FDI inflow, Nigeria must look inward if it is to bounce back from the economic shock. With the issue of the coronavirus pandemic, FDI flows are expected to drop by 30% to 40% globally from 2020-2021. The fall in FDI inflow could lead to financial instability, weaker infrastructure, drop in the standard of living and increased unemployment, especially for developing countries.
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The COVID pandemic has disrupted the global economy bringing stress to health and social systems, driving negative economic impact and weakening purchasing power. It is estimated that in February 2020 alone, which was right at the outset of the breakout, there were about 25 million job loss and about $50 billion global export revenue decline globally4.
The pandemic created a crisis situation where market volatility intensified. Stock markets began to fall as the virus advanced from an isolated problem in China to a global pandemic. When measures were taken to prevent further spread, these negatively impacted economic activities in the country causing increased uncertainty among investors and adjustment of economic expectations, resulting in high prices of goods and services, drop in gross domestic product (GDP), low agricultural production and exchange rate fluctuations.
The hidden tool for catalyzing economic growth post-COVID-19
With a population of over 200 million people and depletion of the public health sector, Nigeria faces one of the greater challenges than most African countries in containing the spread of the coronavirus. On one hand the harsh realities of the post Covid-19 era mean that increased borrowing and reserves depletion as foreign investors and international donor agencies are beginning to pull back on investments. On the other hand, Nigeria like other countries within the same HDI bracket need to improve their HDI by exploring innovative financing mechanisms to accelerate growth and development, access to jobs and markets, as well as improve livelihoods.
Times of uncertainty and crisis create new open doors for investors to effect changes with their capital. The need for finding solutions to a crisis can be a catalyst for change in investment strategy. Institutional investors may be drawing back their investments from capital markets due to economic unpredictability, opening the door for impact investors to meet urgent and growing capital needs.
Also Read: How Africa controlled the spread of the global pandemic and reversed the trend
Social investing means investment that is intended to deliver a positive social impact as well as returns on the original investment. Typically, social investment is commonly provided in the form of repayable loans, with a greater flexibility and slightly low interest rates than bank loans, as well as social impact bonds or quasi-equity financing. Rapidly emerging within this financing bucket is impact investment which is a form of innovative financing which involves providing funds for socially beneficial goals aside from the typical business aim of financial return to investors. It is a viable means of facilitating societal development goals and ensuring grassroots development goals in rural areas. When structured properly, impact investing can catalyze a pipeline of high impact solutions, build organizational capabilities to be self-reliant and provide the capital to deliver social impact at scale.
Philanthropists, foundations, impact investors and donors have a crucial and important role to play in responding to the Covid-19. They have the unique opportunity to rethink their investment strategies to be more focused on rebuilding community resiliency and economic growth. For individual and corporate philanthropies seeking more efficient ways to give the billions they are sitting on away – impact investing is that mechanism. One way by which philanthropies can evolve their strategy is through patient capital with a new wave of mission-focused investing that can deliver social and financial returns.
Investors can provide basic assets to solid and reliable investment intermediaries, for example, micro development loan funds, which can efficiently and effectively deploy capital for social good, economic growth and development in SMEs. Other mechanisms and vehicles include crowdfunding, venture lending, data-driven lending platforms and risk guarantees.
Small business opportunity to harness Impact Investing
Start-ups and SMEs are drivers for growth, generating employment and creating avenues for the development of entrepreneurial skills. The National Bureau of Statistics (NBS) reported that SMEs contributed about 48% of the national GDP in the last five years with a total of about 17.4 million Nigerians involved in the sector. SMEs are responsible for 50% of industrial jobs and nearly 90% of the manufacturing sector. Adding to these, SMEs are responsible for 84% of employment in Nigeria5.
While Small and Medium Scale Enterprises (SMEs) prepare for the economic realities associated with COVID, they can take advantage of this emerging stream of unorthodox capital to drive traction and growth. SMEs must be innovative, reinvent their business models, have a clear vision and be ahead of the curve.
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Sociocapital is a social impact organization working with private, public, philanthropies and social sector organizations to improve lives, empower communities and transform systems using market-based solutions delivered at scale. With the right mix of market-based approach and social development methodologies, philanthropy can deliver inclusive growth and drive transformative change in ways that can be self-sustaining. Businesses can unlock economic opportunities and capture social and financial value from solving some of the world’s pressing problems committed to closing the gaps of access, opportunity or outcome for those at the bottom of the pyramid. Sociocapital equips and supports ideas, solutions and ventures that increase access to opportunities and services for underserved markets.
Conclusion/Call to action
As countries recover from the COVID-19 outbreak, there is a lot to learn about how donors, philanthropies, development finance institutions and governments have mobilized funding as part of the response and recovery efforts. However, this new opportunity to create a vibrant third sector is where multiple players are strategically positioned to actively participate in economic growth effort in a manner that is sustainable and scalable.
Micro, Small and Medium Enterprises (MSMEs) can be positioned and equipped with the right tools and resources to drive community-centric development. This can be done through effective investment education, ease of access to diversified resource mix and creating a support network of mentors to help MSMEs.
MSMEs must have a clear vision, be innovative, reinvent their business models to harness the emerging opportunities that impact investing offers and be ahead of the curve to take advantage of the new normal.
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Ikechukwu Ibeawuchi is the Practice Lead at Marcus Flynn Nigeria, a Legal and Business Advisory Firm in Nigeria, specialized in providing market entry, government relations, regulatory and compliance support, and solutions to businesses across Africa. He can be reached on i.ibeawuchi@marcusflynn.ng.
