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Nigeria is attracting more foreign investment than it did a year ago, but economists are warning that much of the money flowing into the country can leave just as quickly, making the economy more vulnerable to global financial shocks.
This warning came from Quest Merchant Bank, which said Nigeria’s growing dependence on foreign portfolio investments, often referred to as “hot money”, is increasing the country’s exposure to external risks, even as efforts to stabilise the economy begin to yield results.
The bank’s assessment follows the release of the Central Bank of Nigeria’s (CBN) latest International Investment Position (IIP) report, which showed that Nigeria’s net external liability position widened to $90.2 billion in 2025, compared with $82.7 billion recorded in 2024.
In simple terms, the figures show that foreign investors now have significantly larger financial claims on Nigeria than Nigerians have on the rest of the world.
According to Quest Merchant Bank, the increase was driven largely by a sharp rise in foreign portfolio investments, particularly in government debt instruments such as Open Market Operation (OMO) bills, which have continued to attract offshore investors because of Nigeria’s relatively high interest rates.
The report explained that higher interest rates, ongoing foreign exchange reforms and renewed investor confidence have encouraged foreign investors to channel more funds into Nigerian financial assets in search of better returns.
While these inflows have improved the supply of foreign exchange and helped support the naira, analysts say they also come with significant risks because portfolio investors can withdraw their funds at short notice whenever global market conditions change.
Unlike foreign direct investment (FDI), where companies establish factories, acquire businesses or build long-term operations, portfolio investments are mainly financial investments in government securities, shares and other market instruments.
Because they are easier to move across borders, they tend to react quickly to changes in global interest rates, geopolitical tensions or investor confidence.
This makes countries that depend heavily on such inflows more vulnerable to sudden capital outflows.
Quest Merchant Bank noted that the deterioration in Nigeria’s external liability position reflected stronger foreign ownership of Nigerian financial assets, largely supported by sustained demand for government securities.
However, the bank pointed out that not all the developments were negative.
It said foreign direct investment liabilities increased by $6.7 billion year-on-year, suggesting that more foreign investors are taking long-term positions in Nigerian businesses.
Analysts generally regard such investments as more stable because they involve physical assets and long-term business commitments rather than short-term financial transactions.
The report described the increase as a positive signal of investor confidence in the Nigerian economy.
Nigeria also strengthened its financial buffers during the period.
According to the report, the country’s reserve assets rose by $5.6 billion compared with the previous year, providing the Central Bank with greater capacity to defend the naira and cushion the economy against external shocks.
The country’s external asset position also received additional support from higher Nigerian investments abroad, including direct investments, portfolio holdings and other foreign assets, although their combined contribution was relatively modest at $3.3 billion.
Despite these improvements, Quest Merchant Bank believes policymakers should remain cautious.
The bank warned that Nigeria’s growing reliance on portfolio investment inflows leaves the economy increasingly exposed to changes in global financial conditions.
A shift in investor sentiment, rising interest rates in advanced economies or renewed global uncertainty could prompt foreign investors to withdraw their funds, placing fresh pressure on Nigeria’s foreign exchange market and external reserves.
Still, the outlook is not entirely gloomy.
The bank expressed optimism that stronger international crude oil prices would continue to provide important support for the economy.
“On a positive note, sustained strength in international crude oil prices is expected to support Nigeria’s external position through improved export earnings, stronger foreign exchange inflows, and continued reserve accumulation,” Quest Merchant Bank said.
The report suggests that while Nigeria has made progress in attracting foreign capital and improving external liquidity, maintaining a healthy balance between short-term portfolio inflows and long-term productive investments will be critical to reducing the country’s exposure to future global financial shocks.
