Nigeria's Fiscal Policy Shifts and Implications for Foreign Investment

Nigeria's economic trajectory has long been shaped by its central bank's interventions, but the reforms initiated under Governor Olayemi Cardoso since October 2023 mark a pivotal shift. These policies, aimed at stabilizing inflation, unifying foreign exchange (FX) rates, and fostering investor confidence, have redefined the country's fiscal landscape. Yet, the interplay between these reforms and foreign investment trends reveals a nuanced picture of progress and persistent challenges.

Central Bank Reforms: A Framework for Stability

The CBN's 2023–2025 agenda centered on three pillars: inflation targeting, FX market liberalization, and banking sector resilience. By adopting an Inflation Targeting Framework in November 2023, the CBN sought to anchor price stability through interest rate adjustments and tighter monetary controls. This was complemented by the unification of multiple FX rates, which eliminated arbitrage opportunities and cleared a $7 billion backlog in foreign exchange transactions, according to a Market News report. These measures not only restored transparency but also reduced the naira's volatility, narrowing the gap between official and parallel market rates, according to a Mondaq analysis.

Simultaneously, the CBN introduced stricter regulations for Bureau de Change operators and implemented a forbearance policy for banks, including halting dividend payouts and deferring executive bonuses to strengthen capital buffers, according to a Guardian report. These steps, while disruptive in the short term, were designed to build long-term resilience in the financial sector. The reintroduction of the "Willing Buyer, Willing Seller" pricing model further liberalized the FX market, enabling airlines and investors to repatriate funds more efficiently, as noted by Vanguard.

Investor Confidence: A Surge in Capital, but Mixed Signals

The CBN's reforms have yielded measurable gains in investor confidence. By Q1 2025, total capital inflows into Nigeria reached $5.6 billion-a 67% increase from Q1 2024-driven largely by portfolio investment in the banking sector, Vanguard reported. Diaspora inflows, facilitated by new accounts like the Non-Resident Nigerian Ordinary Account, are projected to double formal remittances, further bolstering liquidity, according to a BusinessDay article. These developments coincided with a drop in Nigeria's sovereign risk spread to its lowest level since January 2020, signaling improved access to international credit markets; Market News also reported on this improvement.

However, foreign direct investment (FDI) trends tell a different story. Despite the CBN's efforts, FDI fell by 19.35% in Q1 2025, dropping to $250 million from $310 million in Q4 2024, according to BizWatch data. This decline reflects lingering macroeconomic uncertainties, including exchange rate volatility and fiscal policy ambiguity. While the CBN reported a $5.6 billion surge in capital inflows, portfolio investment-accounting for 92% of this total-primarily reflects short-term speculative activity rather than long-term commitments, Vanguard noted.

Reconciling the Divergence: Short-Term Gains vs. Structural Risks

The apparent contradiction between rising portfolio inflows and declining FDI underscores the fragility of Nigeria's current economic model. Portfolio investment, though significant, is highly sensitive to global interest rate cycles and geopolitical risks. For instance, the CBN's 875-basis-point hike in the Monetary Policy Rate (MPR) to 27.5% in 2024 attracted short-term capital but may deter long-term investors seeking stable returns, as observed in reporting by BusinessDay. Conversely, FDI requires sustained confidence in regulatory predictability and infrastructure quality-areas where Nigeria still lags.

The CBN's success in stabilizing the FX market and reducing inflation has created a more favorable environment for foreign investors. Yet, the 19.35% drop in FDI highlights the need for complementary reforms, such as improving energy infrastructure and streamlining bureaucratic processes for foreign firms, as reported by BizWatch. As the Guardian quoted the World Bank, Nigeria's reforms are "bold and necessary," but their long-term efficacy will depend on sustained fiscal discipline and private-sector engagement.

Looking Ahead: A Blueprint for Sustainable Growth

Nigeria's experience offers lessons for other emerging markets. The CBN's focus on transparency-whether through FX rate unification or stricter cyber-security frameworks-has demonstrated that institutional credibility can attract capital even in volatile environments, as the Guardian observed. However, the decline in FDI serves as a cautionary tale: monetary policy alone cannot offset structural weaknesses.

For foreign investors, the key takeaway is that Nigeria's reforms have mitigated some risks but not eliminated them. The banking sector remains a prime beneficiary of capital inflows, while sectors like manufacturing and agriculture require more targeted support. As the CBN continues to balance inflation control with growth objectives, the challenge will be to convert short-term gains into durable, inclusive prosperity.

In the end, Nigeria's fiscal policy shifts illustrate a broader truth: economic stability is a prerequisite for investment, but it is not sufficient. The path to sustained foreign investment lies in aligning monetary reforms with structural upgrades-a task that will define the country's economic future.