Nigeria recorded total capital inflows of $5.64 billion in the first quarter of 2025, marking a sharp 67% increase from the $3.38 billion posted in the previous quarter.
However, behind the impressive headline figure lies a deeper issue—more than 90% of the inflows were short-term speculative funds, also known as “hot money”, drawn by Nigeria’s elevated interest rate environment rather than long-term investment interest.
According to the National Bureau of Statistics (NBS), $4.21 billion—representing 74.6% of the total—was channeled into money market instruments, especially Open Market Operation (OMO) bills and Treasury Bills. These short-term debt instruments, issued by the Central Bank of Nigeria (CBN) to manage liquidity and attract foreign exchange, have become the mainstay of foreign capital inflows due to their high yields, which range between 18% and 25%.
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CBN’s Hawkish Stance Pays Off—Temporarily
The spike in foreign inflows is largely tied to the CBN’s aggressive interest rate hikes aimed at attracting foreign portfolio investors and bolstering dollar liquidity. Since the start of the year, the CBN has deployed a hawkish monetary stance to curb inflation, which stood at 31.7% in June 2025, and to steady the naira after months of volatility that saw it plunge to near N1,900/$ earlier this year.
To regain investor confidence and halt the naira’s freefall, the apex bank intensified the use of OMO instruments as a tactical shield, rather than directly piling on public debt. These instruments have not only attracted capital but also helped narrow the spread between the official and parallel market exchange rates. The naira has since appreciated to below N1,550/$ in the parallel market, a substantial recovery.
Portfolio Investment Dominates as FDI Remains Weak
While the influx of foreign capital may appear encouraging on the surface, a closer look reveals a troubling pattern. Portfolio investments accounted for $5.2 billion—or 92.2%—of the Q1 inflows, while Foreign Direct Investment (FDI) remained disappointingly weak at just $126.29 million, making up only 2.2% of the total.
Breakdown of the portfolio inflows includes:
- $4.21 billion in money market instruments (OMO, T-Bills)
- $877.41 million in government bonds
- $117.33 million in equities
The heavy concentration in OMO and Treasury Bills reflects foreign investors’ preference for quick returns with minimal exposure, rather than commitment to productive ventures that generate employment and technology transfer. The bulk of FDI, according to the NBS, came via equity investments in a handful of Nigerian firms—further evidence of limited appetite for long-term engagement with Nigeria’s real economy.
Additionally, $311.17 million came in as foreign loans under the “Other Investments” category, a relatively minor portion compared to portfolio flows.
Hot Money: A Fragile Support System
Experts warn that while hot money has helped steady the naira and calm investor nerves, its volatility presents significant risks. These funds can leave just as quickly as they arrive, especially if global interest rates rise or if the CBN falters in maintaining policy credibility.
Nigeria’s reliance on hot money has been a recurring pattern since the mid-2000s when the CBN began liberalizing the financial markets. During periods of high interest rates or oil-driven investor confidence, portfolio inflows surged—only to evaporate during global shocks like the 2008 financial crisis, the 2014 oil crash, and the COVID-19 pandemic. The current influx may prove similarly fickle if reforms are not deepened.
Policy Reforms Still a Work in Progress
The CBN’s tactical use of high yields to stabilize the naira reflects a short-term fix to deeper structural issues: weak infrastructure, inconsistent regulations, and insecurity that discourage real sector investment. Despite pledges by the Bola Tinubu administration to rebuild investor confidence and tackle corruption, ease-of-doing-business reforms have yet to yield substantial FDI.
Furthermore, analysts caution that the current strategy could become a burden if rising domestic borrowing costs begin to crowd out the private sector or if Nigeria is forced to sustain high interest rates longer than expected.
For lasting stability, analysts say that Nigeria must deepen structural reforms, attract genuine investors, and create an environment conducive to productive enterprise, not just high-yield speculation.