In what looks like a propaganda blitz, several online and hardcopy publications have in recent times been carrying a report that Nigeria’s economy attracted huge foreign portfolio investment (FPI) inflows totaling US$3.48 billion in the first six months of 2024. This is as against only US$756 million of FPI that came into the country the same time in the previous year.
The publications (including the ‘Platform Times’) said: “This is attributed to the Central Bank of Nigeria’s (CBN) economic reforms, which have continued to enhance Nigeria’s position as an attractive investment destination.” The publications stated that “this resulted in the huge volume of FPIs in six months of reforms, compared to the meagre inflow in the pre-reforms era.”
This trend, as all the publications concluded, reflects growing investor confidence in the CBN’s ability to manage the financial system, and the economy, and constitutes a positive signal for global investors.
However, while it can be conceded that rising inflow of FPIs into Nigeria is policy-driven, it is even more pertinent to vividly point out and analyze the costs (real and potential) of such a trend on the fragile Nigerian economy.
Specifically, the CBN has been ‘fighting’ runaway inflationary trend in the country by consistently increasing the benchmark interest rate in the banking system. From about 18 per cent in May 2023, the apex bank has raised the Monetary Policy Rate (MPR) to 27.50 per cent since November 2024. This is a jump of almost 10 per cent in 18 months!
In other words, the CBN interpreted the soaring inflation rate in Nigeria since May 2023 as a ‘monetary phenomenon’; that is: only so much money in circulation was driving inflation sky-high. But this stance has been proven wrong, since the consistent increases in MPR have failed woefully to tame the runaway inflationary trend.
In point of fact, the hiking of the MPR and other monetary policy instruments such as Cash Reserve Ratio (CRR) practically dried up credit in the financial system. While the apex bank applied the CRR to ‘suck away’ perceived much liquidity from the deposit money banks (DMBs), it used the MPR to drive lending and deposit rates.
This has played out in the financial system in the past two years, and largely led to the ‘crowding out’ of many businesses and households in the local credit market. Many Micro, Small and Medium-scale Enterprises (MSMEs) have been scotched to death by lack of access to (affordable) funds. Hitherto operating intervention bodies that were giving loans at concessionary rates have all been shut down by the CBN.
This tight monetary stance has manifested in the DMBs charging interest rates of between 30 to 40 per cent per annum on their credit facilities. As survival strategies, many businesses have had to scale down their installed capacities, or relocated elsewhere, to enjoy lower-cost operating environment.
And this is why the CBN loomed large with its bouquet of offerings: Treasury Bills of various tenures. In line with its hiked MPR, the apex bank offered mouthwatering rates to institutional and retail investors who subscribed to the T-Bills. These highly attractive yields were mostly packaged to lure foreign portfolio investors (FPIs).
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The belief of the CBN is that inflow from the FPIs would be used to stabilize the highly volatile foreign exchange (FX) market, where paucity of FX remains the critical issue. But inflows from FPIs are ‘hot money’, chasing huge returns and other attractions across the globe.
Generally, FPIs can be highly volatile, leading to rapid inflows and outflows of capital—which can destabilize any economy. No wonder, therefore, in spite of the reported huge FPI inflow by the CBN, the apex bank is yet to achieve substantial stability of the FX market.
It has also come to show that the huge inflow and outflow of the FPIs in Nigeria in recent times, are contributing to the upward pressure on the exchange rate. This is because virtually at every point in time, huge sums of FX are being pulled out by the foreign investors to other climes.
Put differently, huge FPI inflows into Nigeria have been somehow responsible for liquidity challenge in the FX market. Often, many of the FPIs ‘cash out’—or suddenly withdraw their funds—causing credit crunch and macroeconomic instability.
It goes without saying that FPIs as ‘hot money’ flow in and out of the economy quickly, creating instability and undermining domestic policies. This, for Nigeria, largely accounts for why in spite of the huge FPI inflows being flaunted, the country’s FX market remains vulnerable to the vagaries of inflows from crude oil sales, among others.
In all, the single-minded pursuit of FPIs by the monetary authority in Nigeria seems to have blinded it to the root causes of the lingering high inflationary trend, and other distortions. For instance, the full floatation of the Naira in the FX market, when it was done mid-June 2023, looked a peremptory action.
A managed FX float, in Nigeria’s weak economic condition, would have fared better for the country. The full floatation, now euphemistically called exchange rates unification, suddenly sank the Naira in a bottomless pit in the global FX market place. All efforts so far are only aimed at restoring some strength to the weakened local currency.
Also, it has become too obvious that the runaway inflationary trend in the country in the past two years, was not a ‘monetary phenomenon.’ In point of fact, it was essentially one fiscal ‘fiat’ that triggered the sudden spike in inflation: namely the sudden full removal of fuel subsidy on April 29, 2023.
Although, the cesspool of corruption and malfeasance that the subsidy phenomenon was, necessitated its removal, the abrupt and ill-digested approach in doing so, has continued to wreak havoc on the fundamentals of the Nigerian economy.
Fuel subsidy removal not only spiked the price of petrol (by over 400 per cent) but also the prices of all goods and services in the country. From below N200 per liter at end-May 2023, the price of fuel has jumped to hover around N1000 per liter since end-December 2024.
In consequence, headline inflation rate that was about 22 per cent in June 2023, skyrocketed to almost 35 per cent at end-December 2024. Rather than adopting monetary-fiscal initiatives to dampen the raging inflation, the CBN opted to deploy essentially monetary policy tools to single-handedly ‘fight’ the inflationary ‘monster.’
The truth is that the so-called ‘drop’ in the inflation rate from the 2024 year-end level to 23.71 per cent in April 2025, is artificial. The National Bureau of Statistics (NBS) merely rebased the Consumer Price Index (CPI), to achieve lower inflation rates.
It has therefore been an anomaly that the CBN has been ‘fighting’ high inflation rate at huge costs to the economy. The high interest rate regime that the CBN unleashed to keep attracting FPIs has done a lot of harm to the economy. No business entity that left Nigeria in the past two years did not refer to high cost of funds and FX challenges as reasons for their exit.
If the huge FPIs inflow has been really reliable and beneficial to the economy, would the Federal Government of Nigeria be cap-in-hand borrowing from the World Bank, the IMF, the African Development Bank (AfDB), African Export Import Bank (AfreximBank), etc.? FPI is ‘hot money’, and cannot be relied upon to address the deep-rooted FX problem, and macroeconomic volatility in Nigeria.
Adoption of properly harmonized fiscal-monetary initiatives in ‘fighting’ inflation, and improving FX inflow would be more palatable and business-friendly for Nigeria. The current rabid pursuit of FPI at huge costs to the economy is obviously ruinous!
- The author, Okeke, a practicing Economist, Business Strategist, Sustainability expert and ex-Chief Economist of Zenith Bank Plc, lives in Lekki, Lagos. He can be reached via: obioraokeke2000@yahoo.com (08033075697) SMS only