IMF warns Nigeria against reliance on hot money as foreign inflows surge

…Urges CBN to maintain tight monetary policy

The International Monetary Fund (IMF) has warned Nigeria against excessive reliance on foreign portfolio investments, commonly known as “hot money”, even as the country records a surge in capital inflows, stronger foreign exchange liquidity and rising external reserves.

In its latest Article IV consultation on Nigeria, the IMF commended the authorities for reforms implemented over the past three years that have strengthened macroeconomic stability and improved resilience. However, it cautioned that Nigeria should reduce its dependence on portfolio flows, which can reverse quickly during periods of global uncertainty.

“Directors called for reducing reliance on portfolio flows with roll-over risk, phasing out remaining exchange restrictions, capital flow management measures, and remaining multiple currency practices as conditions permit,” the IMF said.

The warning comes as foreign portfolio investments continue to dominate capital inflows into Africa’s largest economy.

According to the latest capital importation report published by the National Bureau of Statistics (NBS), total capital inflows into Nigeria rose sharply by 61 percent quarter-on-quarter and 84 percent year-on-year to $10.4 billion.

Analysts at Quest Merchant Bank noted that the figure represents the highest quarterly inflow ever recorded in Nigeria’s capital importation data and places foreign capital inflows firmly above pre-pandemic levels.

“This figure represents the highest quarterly inflow recorded in our historical data, firmly positioning imported capital above pre-COVID levels. Consistent with historical trends, foreign portfolio inflows (FPIs), which increased sharply by 80 percent quarter-on-quarter and 90 percent year-on-year to $9.9 billion, continue to dominate Nigeria’s capital imports, accounting for approximately 95 percent of total inflows,” the analysts said.

The strong appetite from foreign investors has been supported by attractive yields, exchange rate stability and confidence in ongoing economic reforms.

Data from the Central Bank of Nigeria (CBN) also showed a significant improvement in foreign exchange flows at the start of the year.

Nigeria recorded a net foreign exchange inflow of $9.22 billion in January 2026, almost three times the $3.11 billion recorded in December 2025.

Aggregate foreign exchange inflows increased by 45.24 percent to $12.23 billion in January from $8.42 billion in the previous month, while total outflows declined, resulting in a substantially stronger net inflow position.

The IMF acknowledged that stronger inflows have helped improve the country’s external buffers.

Gross international reserves rose to $46 billion in 2025 from $40 billion at the end of 2024, supported by a current account surplus, non-resident purchases of CBN open market operation instruments and a Eurobond issuance.

Net international reserves also increased significantly to $35 billion at the end of 2025 from $23 billion a year earlier.

The improvement has continued into 2026, with Nigeria’s external reserves recently climbing above the $50 billion mark for the first time in 17 years, strengthening the Central Bank’s ability to support the foreign exchange market and meet external obligations.

Despite these gains, the IMF stressed that portfolio flows remain inherently volatile because investors can quickly withdraw funds in response to changes in global risk sentiment, interest rates or economic conditions.

Analysts have repeatedly described foreign portfolio investments as “hot money” because they are typically invested in short-term financial instruments and can leave as rapidly as they enter.

The Fund’s concerns come amid growing uncertainty in global markets following rising fuel and food prices, geopolitical tensions and shifting monetary policy expectations in advanced economies.

While praising Nigeria’s commitment to a flexible exchange rate regime, the IMF urged policymakers to continue reforms aimed at building a more durable and diversified source of foreign exchange earnings.

The Washington-based institution also encouraged authorities to phase out the remaining exchange restrictions and strengthen the foundations for long-term capital inflows through improved productivity, investment and economic diversification.

The IMF board agreed that the Central Bank of Nigeria should maintain a tight monetary policy stance with a data‑dependent approach until disinflation is entrenched and inflation expectations are anchored.

The IMF said Nigeria’s economic reforms have strengthened resilience and improved macroeconomic stability, but noted that maintaining those gains would require continued policy discipline and reduced vulnerability to potentially volatile portfolio flows.