How FG Can Turn Hot Money Into Long-Term Growth — Experts

0

LAGOS – Experts have advised the Federal Gov­ernment to strengthen the ease of doing business, expand infrastructure, ensure policy consistency and deepen economic reforms to convert short-term investor interest in Nigeria’s economy into last­ing productive investments.

This is coming as they raised con­cerns over the composition of foreign capital inflows in the first quarter of 2026, with portfolio investments accounting for more than 95 percent of the total, while foreign direct investment (FDI) remained relatively weak.

Recall that Nigeria recorded a sharp increase in foreign capital inflows in the first quarter of 2026, attracting $10.37 billion, an 83.8 percent rise compared with the correspond­ing period of 2025, according to data released by the National Bureau of Statistics (NBS).

The strong performance signals growing investor confi­dence in the country’s economic reforms and improved macroeco­nomic environment.

Analysis by SBM Intelligence showed that the surge in capital imports was driven largely by foreign investors’ appetite for money market instruments and fixed-income securities, particu­larly bonds, as Nigeria continues to offer attractive yields amid ongoing reforms in the foreign exchange market.

Of the total inflows recorded during the quarter, portfolio in­vestments dominated, reflecting strong participation by foreign investors seeking short-term returns.

In contrast, FDI – widely regarded as the most stable and growth-enhancing form of foreign capital – amounted to just $135 million, highlighting persistent challenges in attract­ing long-term productive invest­ments.

The development underscores a recurring feature of Nigeria’s capital importation profile, where short-term portfolio flows continue to outweigh invest­ments in critical sectors such as manufacturing, infrastructure, agriculture and technology.

The banking sector emerged as the biggest beneficiary of for­eign capital inflows during the pe­riod, attracting the largest share of investments.

Industry analysts attribute this to ongoing recapitalisation efforts by banks, improved li­quidity conditions and growing investor confidence in the finan­cial services sector.

The sharp increase in capital inflows comes amid broader ef­forts by the Federal Government and the Central Bank of Nigeria (CBN) to stabilise the economy through a series of reforms, in­cluding exchange-rate liberali­sation, tighter monetary policy and measures aimed at improv­ing transparency in the foreign exchange market.

These reforms have contribut­ed to improved foreign exchange liquidity, stronger external re­serves and a more predictable investment environment, fac­tors that have helped restore confidence among international investors.

Despite the encouraging head­line figures, the International Monetary Fund (IMF) has cau­tioned Nigeria against becoming overly dependent on portfolio investments, often referred to as “hot money” because of their highly mobile nature.

The Fund noted that while portfolio inflows can provide immediate support for foreign exchange reserves and financial markets, they can reverse rapidly in response to changes in global financial conditions, investor sentiment or domestic economic uncertainties.

According to the IMF, exces­sive reliance on short-term capi­tal exposes economies to sudden capital flight, exchange-rate volatility and potential financial instability.

The institution, therefore, urged Nigerian authorities to intensify efforts to attract more long-term foreign direct invest­ment that can create jobs, boost productivity and support sustain­able economic growth.

Economic experts share sim­ilar concerns, noting that FDI brings not only capital but also technology transfer, managerial expertise and long-term commit­ments that contribute to industri­al development.

They argue that although the current surge in portfolio investments reflects renewed confidence in Nigeria’s economic management, the country must address structural challenges that continue to discourage long-term investors.

These include infrastructure deficits, high energy costs, regu­latory uncertainties, insecurity and bureaucratic bottlenecks.

The latest figures nevertheless represent a positive signal for Af­rica’s largest economy, suggest­ing that reforms undertaken over the past two years are beginning to yield results.

Rising capital inflows have helped improve foreign exchange liquidity and support the naira, while also providing additional resources for financial intermedi­ation and economic activity.

Market observers say the challenge for policymakers will be sustaining investor confidence while creating conditions that at­tract higher levels of FDI.

Achieving this balance, they argue, will help Nigeria reduce its vulnerability to external shocks and build a more resilient growth model.

As global investors contin­ue to monitor developments in emerging markets, Nigeria’s ability to transform growing portfolio interest into substan­tial long-term investments may determine whether the recent surge in capital inflows translates into durable economic growth and development.

For now, the country can cele­brate a significant rebound in for­eign capital imports, but the com­position of those inflows remains a reminder that sustainable growth ultimately depends on attracting investment that stays for the long haul rather than cap­ital that can leave at short notice.