Growing investment inflows through economic reforms

Foreign portfolio investment inflows into Nigeria appear to be on the uptick, writes FELIX OLOYEDE

Investor confidence seems to be gradually returning to the Nigerian economy as the country attracted $3.48bn in foreign portfolio investment inflows over six months following some economic reforms. This is a significant departure from the $756.1m FDI the country recorded before the Central Bank of Nigeria initiated its economic reforms.

In addition to the uptick in the PFI, there appears to be a form of reform stability in the previously volatile foreign exchange market. The CBN had in 2023 eliminated multiple exchange rates and implemented a unified exchange rate regime. This came on the heels of the billions of dollars the CBN had spent in propping up the naira. The action depleted the nation’s external reserves.

However, the reforms initiated by the CBN propelled the country’s external $40.91bn on January 6, 2025, from $33.3bn on September 15, 2023, when Yemi Cardoso took over the leadership of the apex bank. However, it dropped to $39.04bn as of February 14, 2025.

The protracted scarcity of the dollar in the country had made it difficult for the CBN to meet its forex obligations to businesses, recording over $7bn on backlog. But with the improvement of dollar inflow into the country, the over $7bn backlog has reportedly so far been cleared.

Moreso, the CBN has helped to stabilise the country’s forex market.  Volatility, which hitherto characterised the Nigerian forex market has become a thing of the past. The naira, weakened to almost N2,000/$ has strengthened to N1,508.59/$ at the official window as of February 17.

An economist with the Ajayi Crowther University, Dr Segun Ogundare, told The PUNCH that the CBN has ensured stability in the forex market.

“The government’s reforms in electricity, forex and oil sector are good. It is going to yield good results in the long run. The only issue is that it has come with pain to the masses,” he noted.

He added that the government needed to do more to alleviate the suffering of the masses and let them feel the effect of the reforms on their standard of living.

Many believe the devaluation of the local current from 462.88/$ on June 9, 2023, to 632.27/$ on June 14, 2023, when the apex bank floated the country’s exchange rate, has brought untold hardship to Nigerians.

“Yes, reforms are good. I am not against it. We have been beating our future; we want to make things right now. The question is: where did this government meet the exchange rate? The government met the exchange rate at around 480/$. Now it is above 1,500/$. So, what are we saying?

“Is the populace feeling the reforms? It is biting hard. The exchange rate is still dancing. Are the reforms as effective as it should be? Ogundare quizzed.

When Cardoso assumed office in 2023, he made it clear that he would prioritise rebuilding Nigeria’s economic buffers and strengthening resilience.

Inflation, which had soared to 27 per cent, was one of the most pressing challenges facing the economy. This surge was partly due to excessive growth in the money supply. Over the past eight years, GDP growth had stagnated at a mere 1.8 per cent, while the money supply expanded rapidly, averaging an annual growth rate of about 13 per cent.

The imbalance not only drove inflation higher but also led to a significant depreciation of the naira. He explained that inflation breeds uncertainty for households and businesses, functioning as an invisible tax by eroding purchasing power and increasing living costs.

The nation also faced a fiscal crisis, exacerbated by unsustainable deficit financing through the Central Bank’s Ways and Means advances, which soared to an unprecedented N22.7tn by 2023—nearly 11 per cent of GDP. Additionally, the CBN’s quasi-fiscal interventions, exceeding N10tn, further weakened market confidence and undermined the effectiveness of monetary policy.

Amid these challenges, the CBN, under Cardoso’s leadership, has revived optimism in managing the financial system and economy. The ongoing macroeconomic stabilisation efforts have strengthened Nigeria’s ability to attract foreign investors.

By the end of 2024, Nigeria capitalised on its improving economic fundamentals to re-enter the Eurobond market to address its fiscal deficit. This marked its return to the international debt market in November after a two-year absence. The dual-tranche Eurobond issuance saw overwhelming investor demand, with subscriptions exceeding $9bn.

Despite the strong interest, the government opted to raise $2.2bn, comprising $700m in 6.5-year bonds maturing in 2031 at a 9.625 per cent coupon rate and $1.5bn in 10-year bonds with a 10.375 per cent coupon rate.

The high-interest rate environment also spurred foreign portfolio investment inflows, reaching $3.48bn in the first half of 2024—compared to $756.1m in the same period of 2023. This trend signals growing investor confidence in Nigeria’s ability to manage its external debt, reinforcing positive sentiment toward its Eurobonds.

Although inflation remains a major concern, with consumer prices hitting 34.80 per cent in December, the CBN’s aggressive tightening—raising the monetary policy rate by 875 basis points to 27.50 per cent in 2024—aims to anchor inflation expectations.

The elevated policy rate, expected to persist into 2025 with possible rate cuts in the first half, could attract more foreign portfolio investors to Nigeria’s fixed-income market, offering competitive yields. While inflationary pressures persist due to fuel price deregulation and exchange rate adjustments, the overall outlook suggests a gradual improvement.

At the last Banker’s Night in Lagos, Cardoso reaffirmed the CBN’s commitment: “I want to assure you that at the Central Bank, every decision we make is driven by a commitment to serving the best interests of the people. We will continue strengthening our internal capacity and processes to ensure our decisions remain firmly rooted in evidence-based analysis.”

The Head of Investment Research and Global Macro Strategist at Commercio Partners, Ifeanyi Ubah, noted that the government would continue meeting its obligations through a mix of multilateral loans, syndicated facilities, and potential new Eurobond issuances.

In his report titled “Nigeria’s Eurobond Outlook: Resilience Amid Global Uncertainty”, he stated that the country’s Eurobond performance in 2025 would depend on a delicate balance between domestic reforms and global monetary conditions.

“Strengthening foreign reserves, improving fiscal revenues, and progress in structural reforms provide a solid foundation for managing external debt. However, global headwinds—especially a potentially hawkish U.S. Federal Reserve amid rising inflation—could weigh on market sentiment,” he noted.

If the Fed maintains restrictive rates, investor appetite for emerging market assets, including Nigeria’s Eurobonds, could weaken, pushing yields higher. However, continued reform momentum and effective management of external liquidity risks could offset some of these pressures, making Nigeria’s Eurobonds an attractive option within the SSA region.

For now, the outlook remains cautiously optimistic, contingent on coherent domestic policies and external economic conditions.

Although concerns remain about net reserves—due to FX swaps with local banks—Nigeria’s gross reserves provide an estimated nine months of import cover, exceeding the median for peers in the ‘B’ rating category. However, ongoing security challenges, particularly in oil-producing regions, could hinder efforts to increase crude production, projected to average 1.4 million barrels per day in 2025—still below pre-pandemic levels.

Fitch Ratings

Fitch Ratings upgraded Nigeria’s long-term Foreign Currency Issuer Default Rating (FCY-IDR) outlook to “Positive” from “Stable” while affirming the IDR at “B-.”

This upward revision was attributed to ongoing fiscal and monetary policy reforms, including reductions in fuel subsidy costs, a scale-back of deficit financing via Ways & Means, forex backlog clearance, and improvements in crude oil output in the first quarter.

According to analysts at Afrinvest West Africa Limited, this favourable rating will aid local banks in raising foreign currency capital as they strive to meet the CBN’s recapitalisation benchmarks. The firm urged fiscal and monetary authorities to reinforce efforts in boosting oil production, curbing inflation, and stabilising the exchange rate.

Nigeria’s return to the Eurobond market aligns with similar moves by other African nations, such as the Benin Republic and Ivory Coast, signalling renewed investor interest in the continent’s debt instruments.

MPC insights

A member of the CBN-led Monetary Policy Committee, Bala Bello, highlighted key indicators that continue to attract both domestic and international investors.

He pointed out that the domestic economy remains resilient, supported by a strong financial system with sound prudential indicators. “Capital adequacy, liquidity, and Non-Performing Loan ratios remain within prudential limits, reflecting proactive regulatory oversight and robust risk management practices. Significant credit has been directed toward growth-enhancing sectors such as agriculture, manufacturing, and commerce,” he said.

According to him, this credit expansion has stimulated economic activities and bolstered output performance. Stress tests indicate that banks’ solvency and liquidity ratios remain resilient, even in the face of potential macroeconomic shocks, although continued vigilance is required to ensure financial system stability.

Despite lingering risks, Nigeria’s real GDP growth has remained positive, recording 3.46 per cent in Q3 2024—up from 3.19 per cent in Q2 and 2.54 per cent in Q3 2023.

“This growth, driven by both the oil and non-oil sectors—particularly the Services sector—demonstrates the resilience of our economy. The non-oil sector grew by 3.37 per cent in Q3, up from 2.80 per cent in Q2, while the oil sector expanded by 5.17 per cent year-on-year, compared to 10.15 per cent in the previous quarter,” he noted.

Another MPC member, Aloysius Ordu, highlighted improvements in Nigeria’s current account balance, which recorded a surplus of $6.29bn in Q3 2024, up from $5.14bn in Q2. The overall balance of payments also showed a surplus of $3.79bn.

Another MPC member affirmed the stability of Nigeria’s Balance of Payments, which recorded a surplus in Q3 2024 due to strong current account performance and net asset acquisitions.

Total foreign exchange inflows stood at $6.175bn in September 2024, compared to $2.57bn in August. Foreign reserves, which reached $39.68bn at the end of October, are projected to rise further by year-end due to reduced import demand following full deregulation of the downstream oil sector and increased FX inflows.

These developments collectively reinforce Nigeria’s economic resilience and attractiveness to investors, despite global uncertainties.

Analysts argue that for the current reforms to be beneficial for Nigerians, they must result in lower prices of goods and services, particularly food, along with a stronger naira, given that the country remains heavily reliant on imports.

They emphasized the need for better coordination between monetary and fiscal policies. Additionally, they suggested that the government should enhance security in the food-producing regions to lower food prices, which have been a significant factor contributing to inflation in the country.