Negative real interest rates, a situation where inflation outpaces interest rates, effectively eroding the purchasing power of savings, might slow down foreign investment inflows into Nigeria in 2025. This is a significant concern, as foreign capital plays a crucial role in driving economic growth and development.
This depressing assessment comes from the latest economic report by PricewaterhouseCoopers (PwC) International Limited, titled “2025 Nigerian Budget and Economic Outlook.” The report highlights how these negative real interest rates are a major deterrent for both domestic and international investors.
“Declining interest rates in advanced economies are likely to lead to a reallocation of funds to more competitive markets offering higher real returns,” the report states. “However, Nigeria may not benefit significantly from this because its negative real interest rates…may discourage investors.”
This situation is compounded by the potential for capital outflows from Nigeria. “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,” the report warns. “This 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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While the report acknowledges that capital flows are projected to remain moderate in 2025 due to investor caution, the threat of significant capital outflows looms large.
It’s crucial to examine recent trends to understand the current investment landscape. In Q2 2024, total capital importation in Nigeria surged by 152%, reaching $2.6 billion compared to $1 billion in the same period of 2023. This growth was primarily driven by a rise in foreign portfolio investments (FPIs) and other investments despite a significant drop in foreign direct investment (FDI).
The report notes that diaspora remittances remain a vital source of foreign exchange for Nigeria, averaging $20 billion annually over the past decade. However, inflows dipped slightly to $19.5 billion in 2023, primarily attributed to slower economic growth in key remittance-sending countries like the United States and the United Kingdom.
Looking ahead, PwC projects an uptick in remittance inflows, supported by several factors:
Improved Economic Conditions Abroad: As advanced economies lower policy rates and stabilise, Nigerians residing in these countries are likely to remit more funds.
CBN Supportive Policies: The Central Bank of Nigeria (CBN) is taking steps to encourage higher remittance inflows, such as granting licenses to new International Money Transfer Operators (IMTOs) and implementing a willing-buyer willing-seller model.
Increased Diaspora Engagement: The Nigerians in Diaspora Commission (NiDCOM) is actively working to foster stronger ties with the Nigerian diaspora and encourage higher remittance volumes.
While these factors offer some hope, the overarching concern remains the negative impact of negative real interest rates on foreign investment inflows. The Nigerian government and the CBN must address this critical issue through effective monetary and fiscal policies to attract foreign capital and foster sustainable economic growth.
