Nigeria’s economy expands windows for FDI inflows

Nigeria is once again catching the attention of global investors. Recent data from the National Bureau of Statistics (NBS) shows that capital inflows into the country rose to $5.6 billion in the first quarter of 2025, marking a five-year high. This surge reflects renewed confidence in Nigeria’s economy, bolstered by the Central Bank of Nigeria’s (CBN) reforms and a stable macroeconomic environment, writes JOSEPH INOKOTONG.

FOR years, foreign capital inflows have been weighed down by volatility, poor liquidity in the foreign exchange market, and wavering policy consistency. The current trend, however, suggests that a stronger narrative of stability and reform is beginning to take hold.

The International Monetary Fund (IMF) has consistently emphasised that sustained inflows of foreign direct investment depend on a combination of factors, ranging from market size and growth potential to macroeconomic stability, regulatory transparency, and the ability to repatriate profits without restrictions.

For Nigeria, the convergence of these conditions has been uneven in the past. The country’s vast consumer market and demographic advantage have long been attractive, but weak monetary policy credibility, persistent inflationary pressures, and currency misalignment discouraged many long-term investors. What is emerging now is a gradual alignment between Nigeria’s structural opportunities and the macroeconomic benchmarks that global institutions use in assessing destinations for foreign capital.

The IMF’s body of work on the determinants of FDI highlights several key factors that influence multinational investment decisions. Market size, political and macroeconomic stability, GDP growth potential, and investor-friendly regulation stand out as decisive considerations. Surveys of global business executives frequently confirm these findings, stressing that being able to move profits back to home countries freely is as important as the returns themselves. Fiscal incentives such as tax breaks can play a supportive role, but they rarely compensate for structural weaknesses in governance, regulatory transparency, or policy credibility.

Nigeria’s case illustrates this point. In recent years, reforms targeting foreign exchange liquidity, transparent monetary policy, and broader market access have had more profound impact on investor sentiment than temporary fiscal incentives.

When Olayemi Cardoso assumed office as CBN Governor in October 2023, his immediate focus was rebuilding Nigeria’s economic credibility at home and abroad. Among his earliest and most consequential steps were the unification of exchange rates and the clearance of a $7 billion FX backlog that had created deep distortions in trade and investment flows. These measures signalled a decisive break with ad-hoc interventions and restored some measure of investor trust in Nigeria’s policy direction. For portfolio and prospective direct investors alike, the reforms sent a message that Nigeria was serious about addressing fundamental weaknesses in its financial markets.

The currency reforms allowed investors to better price risk and improved the transparency of forex transactions. Reduced CBN interventions in the FX market signalled a move toward a more market-determined system, aligning Nigeria more closely with international best practice. The IMF and World Bank both described these steps as bold interventions with the potential to secure long-term macroeconomic stability.

The immediate benefits have been tangible. Nigeria’s sovereign risk spread has fallen to its lowest point since January 2020, eliminating much of the pandemic-era risk premium. Lower sovereign spreads reduce borrowing costs not only for government but also for businesses, making capital formation easier. Portfolio investors, in particular, have responded to this environment by directing funds into Nigerian instruments, and while these flows are short-term in nature, they create a bridge to long-term investor confidence.

NBS’s “Nigeria’s merchandise trade Q2 2025” report underscores this mixed but encouraging picture as Nigeria’s trade hits ?38 trillion in Q2, and surplus widened to ?7.5 trillion.

Nigeria’s merchandise trade rose to ?38.04 trillion in the second quarter of 2025, marking a 20 percent increase from ?31.68 trillion in Q2 2024 and up 5.6 percent from the previous quarter, the National Bureau of Statistics (NBS) has reported.

Exports remained the key driver, rising to ?22.75 trillion and accounting for nearly 60 percent of total trade. Crude oil contributed ?11.97 trillion, or 52.6 percent of exports, while non-crude exports stood at ?10.78 trillion, with non-oil products valued at ?3.05 trillion. Imports reached ?15.29 trillion, representing 40.2 percent of trade, up 9.4 percent year-on-year but slightly lower than Q1’s ?15.43 trillion. The trade balance stayed positive at ?7.46 trillion, a 44 percent increase over Q1, reflecting stronger export earnings and stable import growth.

In Q1 2025, total capital inflows rose 67.1 percent year-on-year, but foreign direct investment accounted for only $126.3 million, a modest 2.24 percent of the total. Portfolio investments dominated at $5.2 billion, or 92.25 percent, with other investment flows making up the balance.

This heavy skew towards portfolio assets is not unique to Nigeria, as global investors often enter emerging markets through liquid instruments first. Nonetheless, it highlights the challenge Nigeria faces in converting short-term “hot money” into long-term commitments in sectors such as energy, ICT, and manufacturing. Analysts continue to warn that dependence on portfolio inflows leaves the economy vulnerable to shifts in global risk sentiment, interest rate adjustments in advanced economies, or abrupt changes in domestic policy.

Still, the broader trend is significant. The surge in overall inflows demonstrates a growing belief that Nigeria’s economy is stabilising after several years of turbulence marked by inflationary shocks, fiscal deficits, and investor flight. Portfolio managers attribute this renewed optimism to improved currency liquidity, stronger banking oversight, and clearer rules for profit repatriation. These are foundational pillars for broader investment confidence, even if foreign direct investment is yet to respond in equal measure.

The CBN’s policy thrust extends beyond exchange rate reform. A central plank of its agenda is banking sector recapitalisation, which ties directly into the Federal Government’s ambitious plan to grow the economy to $1 trillion GDP by 2030. Governor Cardoso has repeatedly highlighted the inadequacy of current capital levels to service such an expanded economy. Stronger banks, he argues, are essential to underwrite the scale of investment Nigeria requires, from infrastructure and energy to technology and industrialisation. Recapitalisation will therefore ensure financial stability while positioning banks to intermediate larger-ticket transactions that foreign investors typically seek. Well-capitalised financial institutions also serve as an assurance mechanism for international investors wary of systemic shocks.

Parallel to these reforms, Nigeria has embarked on GDP rebasing to reflect new and previously undercounted sectors such as technology, entertainment, and solid minerals. While rebasing is a statistical exercise, its implications are strategic. By capturing the true size and diversity of the economy, rebasing sharpens both policy-making and investment planning. Development economists argue that rebasing highlights untapped opportunities and makes Nigeria appear stronger structurally, sending signals to investors about potential areas for capital deployment. A Lagos-based analyst put it succinctly: while rebasing does not instantly generate wealth, it helps investors and policymakers see the economy’s growth drivers with greater clarity.

Despite the progress, challenges persist. Nigeria’s FDI share of capital inflows remains low, reflecting concerns about infrastructure gaps, insecurity in certain regions, bureaucratic inefficiencies, and perceptions of corruption. These structural impediments cannot be ignored, as they shape investor perceptions of long-term risk.

The IMF has cautioned that while macroeconomic stability is necessary, it is not sufficient. For FDI to grow meaningfully, Nigeria must also demonstrate improvements in governance, the ease of doing business, and the rule of law. Without these, the current momentum risks being confined to portfolio assets that, while helpful, do not generate the same level of job creation, skills transfer, or technology diffusion as direct investment.

Even with these caveats, Nigeria’s investment narrative is being rewritten. The IMF itself acknowledges that the country’s market size, youthful population, and consumer-driven growth potential are significant draws. With reforms addressing FX liquidity, banking stability, and policy credibility, Nigeria is repositioning itself as more than just a destination for speculative capital. Analysts and fund managers are taking notice. Emre Akcakmak of East Capital recently remarked that “Nigeria appears to be back in business as long-awaited economic reforms take shape. Key measures include improved currency liquidity, leeway for investors to repatriate their profit, and the stable naira.”

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What emerges from these developments is a picture of an economy at an inflection point. The surge in capital inflows underlines the credibility of the reforms already in place, especially those led by the CBN. The more enduring task now is to expand foreign direct investment into sectors that can transform Nigeria’s growth trajectory. Infrastructure, energy, ICT, agriculture, and manufacturing require long-term commitments that portfolio flows cannot deliver. Achieving this will demand consistency in reform, improvements in security, and the institutional strengthening that investors regard as critical for confidence.

Nigeria today stands at a threshold. Macroeconomic stability has opened the door to renewed capital inflows and created momentum for wider reforms. The challenge is to consolidate these gains by addressing structural bottlenecks and deepening governance reforms. If this trajectory is sustained, Nigeria could shift from being a market dominated by short-term flows into one of Africa’s most attractive destinations for long-term foreign direct investment. The prize, ultimately, is not just more capital but the kind of investment that drives industrialisation, job creation, and the realisation of the country’s $1 trillion GDP ambition.

Nigeria’s economy is at an inflection point. The surge in capital inflows underscores the credibility of reforms already implemented, particularly those spearheaded by the CBN. However, the bigger prize remains expanding FDI into productive sectors that can drive sustainable growth. For now, macroeconomic stability has opened the door. If complemented by deeper institutional reforms and improved security, Nigeria could transform from a market dominated by short-term flows into one of Africa’s most attractive destinations for long-term foreign investment.