FPI dominance brings rewards and risks

2026-03-30 09:47:02

Nigeria’s latest Capital Importation Report for Q4 2025, released by the National Bureau of Statistics (NBS), reveals a total inflow of $6.443 billion.

This number is a 26.61% increase over the $5.089 billion in Q4 2024 and a 7.13% rise from $6.015 billion in Q3 2025.

While the rise in foreign capital is significant and shows investor involvement in Nigeria’s markets, the breakdown highlights a key issue.

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Most inflows are short-term and liquid instead of long-term and productive. Foreign Portfolio Investment (FPI) made up about $5.49 billion, or 85.14% of total inflows.

Foreign Direct Investment (FDI) was just $357.8 million, or only 5.55%. The rest, $599.65 million (9.31%), was classified as other investments.

Understanding the difference between FPI and FDI is important. FPI is liquid and easy to reverse. Investors can move funds quickly and react fast to changes. For example, an investor can move $10,000 into naira assets and exit within 48 hours, depending on rules and conditions.

FDI invests in assets such as land, factories, and infrastructure, which are hard to sell quickly. Selling these can take months or years and often requires approval. Because FDI is illiquid, that money—and its benefits, like jobs and supply chains—usually stays for years.

In the past, strong FDI and FPI inflows lifted the Naira, slowed inflation, and boosted GDP growth. In 2007, for instance, FDI inflow peaked at $6.09 billion, marking Nigeria’s emergence as a top FDI destination in Africa. Key drivers for this growth were liberalisation policies, debt relief, telecom and oil sector booms.

FPI offers foreign exchange and short-term borrowing options, but it doesn’t fund the big projects Nigeria needs for industrialisation. Short-term funds can’t be used responsibly to build roads, railways, power plants, or factories due to mismatched risks.

Infrastructure requires long-term capital investment in the economy. Active foreign investors boost liquidity, confidence, and capital allocation. But with over 85% of inflows from portfolios, development benefits are limited.

For instance, the Nigerian Minister of Power, Adebayo Adelabu, stated that “put together Nigeria needs over $100b of investments in upstream, midstream, and downstream of the power sector value chain”.

Nigeria can’t fund its $100 billion power sector needs from money market instruments. FDI drives industrialisation by bringing capital, jobs, technology, and management skills. FDI-funded factories join the economy and build productive capacity. FPI provides short-term finance but does not offer the same benefits.

High interest rates in Nigeria attract investors and open up carry trade opportunities. Most foreign capital in Nigeria targets the banking sector, purchasing money market instruments, government bonds, and equities.

Foreign investors borrow cheaply abroad and invest in Nigerian fixed-income assets, often dollar-denominated, to earn large spreads and manage currency risks. Better forex availability also helps investors feel confident that they can be made liquid on demand. These factors have attracted the FPI, boosting the Central Bank of Nigeria’s reserves and bringing short-term stability to the Naira.

Nigeria needs a balance in its capital importation strategy. High-yield bonds and money market instruments help address fiscal and external issues now. But long-run growth depends on raising FDI. To achieve this, Nigeria must improve infrastructure, security, regulation, policy consistency, and the business environment. This will attract investment beyond liquid assets.

The Q4 2025 Capital Importation Report emphasises both progress and a cautionary note. The $6.44 billion in total capital importation is a positive development. It reflects the appeal of Nigeria’s financial markets amid global carry trade dynamics.

Yet the heavy tilt toward FPI (85.14%) versus FDI (5.55%) should remind policymakers that attracting “hot money” is only part of the story and carries risks. The 1997 Asian Financial Crisis was caused by massive inflows of foreign capital, which inflated property and stock market values.

Domestic financial institutions borrowed short-term, foreign-currency funds to fund long-term domestic investments. When hot money flowed out, a systemic liquidity crisis ensued.

Policymakers should actively design and implement strategies to channel a greater proportion of foreign inflows into productive, long-term investments, such as manufacturing, infrastructure, and technology, by addressing known bottlenecks, including fiscal incentives. This specific policy focus, specifically a shift to attract long-term capital, is essential to industrialise, create quality jobs in Nigeria, and build enduring economic robustness.

In summary, the new capital inflow data is positive, but the economy is overly dependent on short-term financing. Shifting focus to foreign direct investment is essential for jobs, productivity, and sustainable growth.

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