Foreign Direct Investments (FDI) into Nigeria have plummeted by a staggering 70.06% quarter-on-quarter, falling to a mere $126.29 million in the first quarter of 2025. This sharp decline from the $421.88 million recorded in the final quarter of 2024 is revealed in the latest Capital Importation report from the National Bureau of Statistics (NBS). While the headline figures for total capital importation might seem positive, a deeper look reveals a troubling reality: foreign investors are shunning long-term, productive investments in favour of short-term, speculative financial instruments. This trend has far-reaching implications for Nigeria’s economic stability and its long-term growth prospects.
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The Stark Contrast: Productive Investment vs. Speculative Flows
To understand the gravity of the situation, it’s essential to distinguish between the various types of foreign capital that flow into an economy. Foreign Direct Investment (FDI) is the gold standard for economic development. It involves a foreign entity establishing a lasting interest in a local enterprise, such as building a new factory, buying a significant stake in a company, or starting a new business venture from scratch. These investments are productive; they create jobs, introduce new technology, and contribute to the real economy. For this reason, FDI is often seen as a direct vote of confidence in a host country’s long-term prospects.
In stark contrast, the surge in capital importation observed in the first quarter of 2025—a 10.86% increase to $5.64 billion from the previous quarter and a 67.12% increase year-on-year—was overwhelmingly dominated by Portfolio Investments. These are short-term, high-yield financial instruments, primarily government bonds and treasury bills. While these inflows help to bolster a country’s foreign reserves and stabilize its currency in the short term, they are notoriously volatile. This type of capital, often referred to as “hot money,” can enter and exit the economy at a moment’s notice, driven by shifts in interest rates or investor sentiment. It does not create jobs or build factories. The NBS data shows that portfolio investments accounted for an overwhelming 92.25% of total capital imported in Q1 2025, while FDI made up a paltry 2.24%.
This growing disparity highlights a significant disconnect in Nigeria’s economy. While it has successfully attracted foreign capital by offering high returns on short-term debt, it has failed to convince investors to commit to the long-term, productive investments that are crucial for sustainable growth. The marginal 5.97% year-on-year growth in FDI, to $126.29 million from $119.18 million in Q1 2024, is simply not enough to counteract the massive quarter-on-quarter collapse and shift the broader trend of dwindling interest.
Understanding the Policy Environment: Tinubu’s Reforms
The current investment landscape cannot be understood without examining the economic reforms introduced by President Bola Tinubu’s administration since mid-2023. These reforms, while heralded by some as necessary for long-term stability, have created a “harsh operating environment” that has profoundly impacted businesses and investor sentiment. Two key policy decisions stand out: the removal of the petrol subsidy and the floating of the naira.
The removal of the fuel subsidy, a cornerstone of Tinubu’s policy, was aimed at freeing up government revenue and eliminating a system widely seen as rife with corruption. However, its immediate effect was a dramatic increase in fuel prices. Since many businesses, particularly manufacturers, rely heavily on diesel for power generation and transportation, this single policy decision led to a massive spike in operational costs. This has put immense pressure on profit margins, forcing some companies to scale back operations or, in some cases, to exit the country altogether.
Simultaneously, the decision to unify the foreign exchange (FX) rates and allow the naira to float freely against the dollar resulted in a sharp depreciation of the currency. While this move was intended to attract foreign investment by creating a more transparent and market-driven FX system, its initial impact was deeply destabilizing. The naira’s value plummeted, making it significantly more expensive for businesses to import raw materials, machinery, and spare parts. For import-dependent manufacturers, this created a dual shock: higher energy costs and higher input costs, making it nearly impossible to maintain profitability. The Nigerian Economic Summit Group has highlighted these issues, noting that the combination of FX volatility and high energy costs has created a hostile business climate.
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The Central Bank’s Role and the Attraction of Short-Term Gains
The Central Bank of Nigeria (CBN) has played a crucial role in shaping the current investment profile through its hawkish monetary policy. Faced with soaring inflation—which reached a 28-year high of 33.7% in April 2024—the CBN has embarked on an aggressive tightening cycle. This involves hiking the benchmark interest rate to record levels to curb inflation and attract foreign capital.
While this policy has had some success in stabilizing the naira and gradually slowing the inflation rate, it has had a very specific, and perhaps unintended, consequence for capital importation. The high interest rates on government securities, such as Open Market Operation (OMO) bills and Treasury Bills, have made Nigeria’s debt market extremely attractive to foreign investors seeking quick, high returns. These investors can buy Nigerian government debt, earn a high yield, and then exit the market quickly if conditions change. This is precisely the kind of speculative, short-term capital that now dominates Nigeria’s capital importation figures.
While the CBN’s efforts to achieve price stability are commendable, the current policy has created an environment where long-term, productive investments (FDI) are being crowded out by a flood of short-term capital. As economist Adewale Abimbola pointed out, this trend reflects a broader sentiment among foreign investors who are finding high-yield opportunities in the financial sector more viable and attractive than the systemic and structural challenges of investing in the real economy.
A Battered Manufacturing Sector: The Heart of the Problem
The decline in capital importation is most acutely felt in Nigeria’s manufacturing sector. Despite a 67.12% year-on-year rise in total capital inflows, the manufacturing sector recorded a significant 32.31% decline in capital importation in Q1 2025, attracting only $129.92 million, down from $191.92 million in the same period of 2024. The sector’s share of total capital importation also fell from 5.68% to a mere 2.30%.
This decline is a direct result of the “two major shocks” identified by Dr. Muda Yusuf, Director of the Centre for the Promotion of Private Enterprise (CPPE). These shocks are: forex and energy prices. Manufacturers have been grappling with the exorbitant cost of diesel and the high price of imported raw materials due to the naira’s devaluation. These challenges, combined with high borrowing costs—as bank interest rates have soared above 30%—have made it exceedingly difficult for manufacturers to operate profitably. The PUNCH’s analysis of 12 manufacturing companies in the first half of 2025 revealed that their cost of sales grew by 19.68%, putting immense pressure on their financial viability.
The ripple effects of a struggling manufacturing sector are widespread. A decline in manufacturing output leads to job losses, reduces a country’s export capacity, and increases its reliance on imported goods, further straining foreign reserves. The exit of multinational corporations, a trend that accelerated in the 2023-2024 period, is a clear signal that the operating environment is not conducive to business growth. While Dr. Yusuf remains cautiously optimistic that improved macroeconomic stability will eventually influence investment decisions, he acknowledges that FDI decisions are “a very slow and painstaking” process, meaning a turnaround will not be immediate.
Expert Opinions and the Road Ahead
The consensus among economists is that while the initial reforms were necessary, their implementation has created a difficult short-to-medium-term environment for real-sector investments. The positive macroeconomic indicators cited by some of the president’s allies, such as a slowdown in inflation and signs of a stable exchange rate, are seen by others as insufficient to address the deep-seated structural challenges.
The focus must now shift from attracting speculative capital to creating an environment that encourages productive, long-term investments. This requires a multi-pronged approach that goes beyond monetary policy. The government needs to:
- Address energy infrastructure: Invest in more reliable power sources and explore alternatives to expensive diesel to reduce operational costs for manufacturers.
- Enhance forex stability: Work towards a more predictable and stable exchange rate to help businesses plan and manage their import costs.
- Improve the business environment: Reduce bureaucratic hurdles, tackle insecurity, and provide targeted incentives for investments in key sectors like manufacturing, agriculture, and infrastructure.
As Adewale Abimbola noted, a drop in foreign capital into the manufacturing sector might suggest that other sectors present more attractive opportunities. The government’s challenge is to ensure that these opportunities are in productive sectors and not just in the high-yield debt market. The recent move by the Tinubu administration to improve fiscal positions at the subnational level is a step in the right direction, as it could empower state and local governments to implement ameliorative measures and boost grassroots economic activities. However, for a real change to occur, the policies must translate into tangible benefits for businesses on the ground.
Conclusion
The latest capital importation data from the NBS paints a complex and cautionary picture. While Nigeria has succeeded in attracting a significant amount of foreign capital, the overwhelming dominance of short-term, speculative inflows over long-term, productive investments is a cause for serious concern. The 70% collapse in Foreign Direct Investment in the first quarter of 2025 is a clear signal that investors are wary of the economic climate, particularly the structural challenges faced by the manufacturing sector.
The government’s bold reforms, while necessary, have created significant operational hurdles for businesses, making the real sector a less attractive destination for capital. Moving forward, a sustained effort to stabilize the macroeconomic environment, address infrastructural deficits, and provide targeted support for key sectors will be essential to reversing this trend. Only by creating a truly conducive environment for FDI can Nigeria hope to achieve the inclusive and sustainable economic growth that its population desperately needs. The current investment profile, dominated by “hot money,” is a fragile foundation on which to build a prosperous future.
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photo source: Google
By: Montel Kamau
Serrari Financial Analyst
11th August, 2025
