Nigeria’s external reserves have seen a significant boost, rising by $7.7 billion to reach $40.3 billion in the 11 months leading up to November 2024. This increase is largely driven by foreign portfolio investments (FPIs), which have been attracted by the country’s high interest rate environment.
The steady growth in Nigeria’s net reserves is attributed to the Central Bank of Nigeria’s (CBN) hawkish monetary policy stance. Analysts at FBNQuest Capital Research noted that the nation’s official reserves have been on an upward trajectory since April 2024, thanks to the surge in foreign portfolio inflows. These inflows are a direct result of the CBN’s interest rate hikes, which aim to curb inflation and stabilize the naira.
CBN Governor Olayemi Cardoso explained that the central bank’s decision to raise benchmark interest rates, now at 27.5%, is intended not only to control inflation and strengthen the naira but also to attract foreign portfolio investors. This year alone, the CBN has raised interest rates by 875 basis points, up from 18.75% in 2023.
The high-interest environment has proven attractive to portfolio investors, who bring in dollars, thereby boosting the country’s reserves. Data from FMDQ reveals that foreign portfolio inflows into the Nigerian economy increased by 40% month-on-month in November, reaching over $1.6 billion.
However, foreign direct investment (FDI) inflows remain relatively flat, with little change from month to month. In November, FDI inflows stood at $241 million, a modest figure given the broader macroeconomic challenges.
Samson Simon, CEO and chief economist at ARKK Economics and Data Limited, cautioned that while the rise in foreign portfolio investments helps address Nigeria’s foreign exchange liquidity issues, such inflows are often volatile and can quickly reverse if investors find more favorable conditions elsewhere.
Despite this, FBNQuest analysts are optimistic that Nigeria’s external reserves will continue to rise in the near term, driven by continued foreign portfolio inflows. The analysts predict that these inflows will be supported by the elevated interest rates and the opportunities they present for carry trade investments.
Foreign portfolio investments in Nigerian equities have also seen notable growth. According to Capital Importation data from the National Bureau of Statistics (NBS), FPI in Nigerian equities reached $284 million in the first nine months of 2024, a 19% increase from the previous year. This marks the highest level of foreign investment in Nigerian equities since 2020.
Despite high inflation and interest rates reaching a record 27.5%, the Nigerian stock market has been a favorable destination for foreign investors, thanks to improvements in the country’s foreign exchange system. The NGX has posted a year-to-date return of 31.34%, though it still lags behind the country’s inflation rate.
As of 2024, foreign portfolio investments account for approximately 61% of Nigeria’s total capital importation. Much of this capital is invested in short-term money market instruments, which have become a key draw for foreign investors looking for quick returns.
Overall, the influx of foreign portfolio investments is seen as a positive indicator for Nigeria’s external reserves, even as the country continues to navigate its complex economic landscape.
