Foreign direct investment (FDI) in Nigeria has exhibited continued sluggishness, despite a notable increase in overall capital importation during the first half of 2024. FDI grew by only 11.51% to $149.01 million, constituting about 2.5% of the total capital importation of $5.98 billion in the same period. This slow performance is indicative of the broader challenges foreign investors face in the Nigerian market, including high interest rates and volatility in the foreign exchange (FX) market. In contrast, other forms of capital inflows saw significant boosts; portfolio investments surged by 360% year-on-year to reach $3.48 billion, while other investments increased by 85% to $2.35 billion, highlighting a growing preference among investors for quicker returns rather than long-term investments.
The National Bureau of Statistics (NBS) reported that the overall capital inflow in Nigeria during H1 2024 more than doubled compared to the same period in 2023, contributing to an improved economic outlook. This increase in capital importation can largely be attributed to favorable conditions in the money market, where yields on Treasury bills and other financial instruments reached exceptionally high levels—up to 22.5% for Treasury bills and 22% for Open Market Operations (OMO) bills. These attractive yield rates motivated a significant portion of foreign portfolio investments, amounting to around 77% of the total, into various money market instruments. This trend indicates a shift towards short-term investment strategies among foreign investors, driven by the appealing returns available in the current financial landscape.
The bond market also attracted significant foreign interest, with an inflow of about $599 million in H1 2024, up 55% from the previous year. This demonstrates a growing appetite for bonds as a secure investment option amid rising benchmark interest rates. However, the overall context remains complex, as the Central Bank of Nigeria raised interest rates at each monetary policy meeting throughout the first half of the year, culminating in a benchmark rate of 26.75% by the end of June 2024. Despite the short-term attractiveness of such investments, analysts caution that ongoing macroeconomic challenges, particularly FX volatility, are likely to suppress FDI inflows. The interplay of these factors underscores the precarious nature of capital inflows in Nigeria.
Sector-wise, banking, trading, and production emerged as the primary beneficiaries of capital importation, capturing 53.4%, 17.8%, and 13.7% of total inflows, respectively. During the second quarter (Q2) of 2024 alone, total capital importation reached $2.60 billion, indicating a dramatic year-on-year increase of 152.81%. However, this represented a significant decline of 22.85% from the previous quarter, raising concerns about capital flight as investors sought to capitalize on recent gains amidst fluctuations in the naira’s value. Analysts from various firms pointed out that while the first half of the year showed recovery signs in capital importation, these gains are at risk unless critical economic issues are addressed.
Cowry Asset Management Limited highlighted that the downturn in capital inflows raises alarms about the stability of key sectors traditionally seen as economic growth drivers. While the high-yield environment has boosted investor sentiment temporarily, inherent foreign exchange challenges continue to hinder long-term investment inflows, creating a cycle of precarious capital movement. There is a consensus among analysts that both fiscal and monetary authorities must take targeted action to resolve these issues and prioritize improving Nigeria’s business environment. Enhanced policies could potentially transform Nigeria into a more attractive investment destination for both long-term and short-term investors.
Finally, Afrinvest analysts echoed the need for strategic improvements in Nigeria’s investment climate. They emphasized the necessity of establishing business-friendly infrastructure, addressing disconnects between policy and private sector realities, and overcoming institutional deficiencies that impede foreign investment. The current trend of biased investment flows towards volatile “hot money” poses a risk to the economy’s stability under external shocks. A robust focus on security, infrastructure, and comprehensive investment incentives is crucial for fostering long-term capital inflow. Only through sustained commitment to these improvements can Nigeria hope to attract the stable foreign direct investment necessary for its economic growth and development.
