Why Nigeria may not attract enough foreign investments in 2025

Nigeria may find attracting foreign investments challenging this year if negative real returns persist, a new report by PwC has projected.

Negative real returns occur when the rate of return on an investment, after accounting for inflation, is less than zero. In simpler terms, even though investment might grow in nominal terms, its purchasing power decreases because inflation erodes its value.

While advanced economies have reduced policy rates as inflation nears target levels, the Central Bank of Nigeria (CBN) raised its policy rate five times in 2024 to combat inflation, which reached 34.8 percent in December 2024.

“Declining interest rates in advanced economies are likely to lead to a reallocation of funds to more competitive markets offering higher real returns.

“However, Nigeria may not benefit significantly from this because its negative real interest rates, resulting from inflation surpassing interest rates, may discourage investors,” PwC said in its economic outlook for 2025.

The report noted that if inflation rises in advanced economies in 2025, their central banks may increase policy rates, leading to a shift of funds towards these markets offering positive real returns.

This action may exacerbate capital outflows from economies like Nigeria, where negative real interest rates diminish the appeal of local assets to international investors.

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Over the past year, Africa’s biggest oil producer has seen a surge in its capital flows, especially foreign portfolio investments (FPIs) buoyed by the high interest rate environment and continued efforts by the CBN to restore investor confidence.

Total capital importation grew by 152 percent to $2.6 billion in Q2 2024, up from $1 billion in Q2 2023, driven by a rise in FPIs which grew from $106.8 million to $1.2 billion and other investments (from $837 million to $1.12 billion).

This is despite a staggering 65 percent drop in foreign direct investment (FDI) to $29.8 million, the steepest fall on record, highlighting investor sentiments for a long-term commitment in the country.

The growth in FPIs was supported by the CBN’s MPR hike, boosting demand for Nigerian money market instruments, while foreign loans and other claims drove the rise in other investments.

FDI declined due to divestments in oil and gas and manufacturing, according to PwC.

Similarly, total direct remittances grew by 27.5 percent to $829.3 million in Q2 2024, driven by CBN reforms such as the removal of exchange rate caps on licensed IMTOs and revised operational guidelines.

“Capital flows are projected to increase in 2025, supported by CBN policy measures aimed at restoring investor confidence,” the report revealed.