Nigeria’s FDI Slumps Amidst Rising Capital Imports: A Paradox of Economic Growth
The Nigerian economy presented a perplexing paradox in the first quarter of 2025. While total capital importation surged to $5.64 billion, a significant increase from the preceding quarter and the same period in 2024, Foreign Direct Investment (FDI) plummeted by a staggering 70.06% to a mere $126.29 million. This stark contrast reveals a concerning trend: foreign investors are prioritizing short-term, high-yield financial instruments over long-term, productive commitments in the Nigerian economy. This preference for volatile portfolio investments over stable FDI raises serious questions about the sustainability of Nigeria’s economic growth trajectory. While the influx of short-term capital may temporarily boost liquidity and stabilize the Naira, it does little to address the fundamental need for structural transformation and sustainable development.
The dwindling FDI inflows are particularly alarming given their crucial role in fostering economic growth. FDI represents a vote of confidence in a country’s long-term prospects, injecting much-needed capital into productive sectors, creating jobs, and driving technological innovation. However, in Nigeria, this vital source of investment has been overshadowed by the allure of short-term gains in the country’s high-yield debt market. The data paints a clear picture: FDI constituted a meager 2.24% of total capital imported in Q1 2025, a significant drop from 8.29% in the previous quarter and 3.53% in Q1 2024. This decline signals a growing disconnect between headline capital inflows and actual investment in sectors capable of driving sustainable economic growth.
A closer examination of the capital importation figures reveals that the surge in inflows was primarily driven by investments in short-term money market instruments, such as government bonds and treasury bills. These instruments, while useful for managing liquidity and stabilizing the currency, offer limited benefits in terms of industrial growth, job creation, and infrastructure development. Over 90% of the capital inflows were directed towards these short-term instruments, highlighting the preference for quick returns over long-term investment in the real economy. This trend is fueled by the Central Bank of Nigeria’s hawkish monetary policy, which has pushed benchmark interest rates to record levels, making these instruments highly attractive to foreign investors seeking high yields.
The manufacturing sector, a key driver of economic growth and job creation, has been particularly hard hit by this trend. Despite a 67.12% year-on-year rise in total capital inflows, the manufacturing sector experienced a 32.31% decline in capital importation in Q1 2025. This decline underscores the challenges facing the sector, including a harsh operating environment, weakened purchasing power, and subdued consumption. The exodus of multinational companies in the 2023-2024 period, coupled with the impact of economic reforms, further exacerbated the sector’s woes. The manufacturing sector’s share of total capital importation also fell significantly, reflecting its diminished attractiveness to foreign investors.
Experts attribute the decline in FDI to a combination of factors, including systemic and structural challenges facing the Nigerian economy. The volatile macroeconomic environment, characterized by currency fluctuations and high inflation, has dampened investor confidence. Additionally, the risk associated with investing in the real sector remains high, deterring long-term commitments from foreign investors. The preference for other sectors, offering more viable and attractive opportunities, has further diverted foreign capital away from manufacturing. While acknowledging the importance of attracting foreign investment, experts also emphasize the need to boost local investor confidence and create a more conducive environment for long-term investment.
Looking ahead, there is hope that improved macroeconomic conditions, including exchange rate stability and decelerating inflation, may help to reverse the declining trend in FDI. However, addressing the underlying structural challenges, such as improving infrastructure, enhancing the ease of doing business, and promoting policy consistency, will be crucial to attracting sustained long-term investment and fostering sustainable economic growth. The focus should shift from attracting speculative capital towards attracting investments that contribute to real economic development and create long-term value. The future of Nigeria’s economic growth hinges on attracting FDI that drives productivity, creates jobs, and fosters innovation.
