Nigeria may face a tough road ahead in attracting significant foreign investment this year, as the country grapples with the impact of negative real interest rates.
This challenge arises from inflation consistently outpacing interest rates, according to the latest report by PricewaterhouseCoopers (PwC) International Limited, titled “2025 Nigerian Budget and Economic Outlook.”
PwC’s report highlights that despite aggressive interest rate hikes by the Central Bank of Nigeria (CBN) in 2024, the country’s real interest rates remain in negative territory. This has made local assets less appealing to both domestic and international investors.
The report also underscores the global landscape of declining interest rates in advanced economies, which has prompted investors to seek markets offering higher real returns. However, Nigeria may not significantly benefit from this trend due to its uncompetitive real interest rate environment.
PwC warns that rising inflation in advanced economies could trigger a shift in global capital flows. Should central banks in developed countries raise their policy rates, investors are likely to redirect funds to these markets offering positive real returns.
Such a scenario could exacerbate capital outflows from Nigeria, further diminishing the appeal of local investments. This concern underscores the importance of addressing structural challenges to attract and retain foreign capital.
While the outlook for foreign funds remains subdued, capital flows into Nigeria are projected to remain moderate in 2025. Investors are expected to remain cautious, even as the CBN implements policies aimed at restoring confidence.
In Q2 2024, Nigeria recorded a notable increase in total capital importation, which surged by 152% year-on-year to $2.6 billion, up from $1 billion in Q2 2023. This growth was primarily driven by:
- Foreign Portfolio Investments (FPIs): Rising from $106.8 million to $1.2 billion, supported by higher demand for Nigerian money market instruments.
- Other Investments: Growing from $837 million to $1.12 billion, largely due to foreign loans and other claims.
However, Foreign Direct Investment (FDI) declined sharply by 65% to $29.8 million during the same period, reflecting ongoing challenges in attracting long-term, stable investments.
Diaspora remittances remain a critical source of foreign exchange for Nigeria, averaging $20 billion annually over the past decade. However, inflows dipped slightly to $19.5 billion in 2023, attributed to slower economic growth in key remittance-sending countries like the United States and the United Kingdom.
Nigeria’s ability to attract foreign investment in 2025 hinges on its capacity to address the structural issues underlying its negative real interest rates. While short-term policy measures by the CBN may provide temporary relief, sustainable growth will require broader economic reforms to create a more investor-friendly environment.