The advice on foreign portfolio investments

At times, the economic prescriptions by global financial institutions, such as the International Monetary Fund (IMF) and the World Bank, to developing nations like Nigeria have been a bitter pill to swallow. Often, the recommendations don’t yield the desired result. In hindsight, Nigeria has fared worse than better with such prescriptions. That informs the present outcry over the latest advice by the IMF that the Federal Government should impose new taxes on petroleum products and telecommunication services, which the government has rejected.   

However, a recent warning from the financial lender to the federal government not to be carried away by the inflow of Foreign Portfolio Investments (FPIs), also known as “hot money,” makes some economic sense. The inevitable note of caution is also timely. Foreign portfolio investments are currently dominating the Nigerian Stock Exchange (NSE). According to the National Bureau of Statistics (NBS), foreign portfolio investments contributed $10.37billion to Nigeria’s capital importation in the first quarter of 2026, almost 95 per cent of total capital importation during the period. FPI involves foreigners passively investing in a country’s financial markets – such as buying stocks or bonds – without taking physical control of the underlying businesses. It is held in liquid financial assets. 

The IMF warning is clear: for developing economies like Nigeria, over dependence on FPI is dangerous and highly volatile because such funds can be pulled out at the first sign of trouble. This could trigger sudden currency crashes, severe stock market crashes, and deep economic instability. It is a double-edge sword with unpredictable liquidity crises in the host nation. Despite recent reports that Nigeria recorded a surge in capital inflows, stronger exchange liquidity and rising external reserves, it is important to heed the timely warning of the IMF and other financial experts in the country. This is because foreign portfolio investments tend to create artificial booms in the capital market, or make a country’s Gross Domestic Product (GDP) look incredibly healthy that does not reflect the physical or structural realities of the broader economy. 

For instance, a recent data from the Central Bank of Nigeria (CBN) showed a significant improvement in foreign exchange flows at the start of the year with a record inflow of $9.22billion in January 2026. This is almost three times the $3.11billion recorded in December 2025. Also, aggregate foreign exchange inflows reportedly increased by 45.24 per cent to $12.23billion in January from $8.42billion in the previous month, while total inflows declined, resulting in a substantially stronger net inflow position. Notwithstanding these seeming good performances on paper, foreign portfolio investments are highly vulnerable to outside variables. They cannot be used to build physical factories, create long-term jobs or improve infrastructure that Nigeria badly needs. They offer little sustainable, real-world economic development. 

A combination of highly mobile portfolio investments could unravel without warning, and cause external reserves to decline. That happened to Nigeria in 2008. No doubt, stronger foreign inflows may have helped to improve Nigeria’s external buffers; we believe that the economy will benefit significantly more from Foreign Direct Investment (FDI). Unlike portfolio investments, FDI involves foreigners actually building physical assets, establishing local branches, or acquiring controlling stakes in domestic companies. Because FDIs are tied to physical infrastructure and long-term business operations, they are not easily pulled out during short-term financial panics. They actively generate employment and technology transfers.

 FDI in Nigeria stood at $135.08 million in the first quarter of 2026, and surged to $357.8million in the final quarter of 2025. Rather than rely too much on foreign portfolio investments, the government should strengthen the non-oil export sector. This should go hand-in-hand with improving other sectors of the economy such as the power sector that is capable of driving growth. Other sectors include agriculture, oil and gas, palm oil, cement and trade and improving security across the country. Oil refining may also weigh down growth due to its highly operational cost and frequent maintenance of the nation’s refineries, which will likely persist beyond this year.

All things considered, while portfolio inflows can strengthen liquidity and improve investor confidence, sustainable economic transformation depends on productive investment, not consumption. With a population exceeding 200 million people and growing roughly by 2.1 per cent annually, that distinction is critical. Nigeria, therefore, needs the type of capital capable of creating jobs, expanding production, increasing exports, and improving living standards. This should be at a rate that keeps pace with one of the world’s fastest-growing populations.