Nigeria’s growing ability to attract foreign capital is strengthening liquidity in the economy, but analysts have warned that increased reliance on short-term foreign investments could leave the country more exposed to global financial shocks.
The warning was contained in an assessment by Quest Merchant Bank following the release of the Central Bank of Nigeria’s (CBN) latest International Investment Position (IIP) report.
The report showed that Nigeria’s net external liability position increased to $90.2 billion in 2025, from $82.7 billion in 2024.
The rise means foreign investors now hold significantly larger financial claims on Nigerian assets than Nigerians hold on assets abroad.
According to Quest Merchant Bank, the widening external liability position was driven largely by increased foreign portfolio investments, particularly in Nigerian government securities such as Open Market Operation (OMO) bills.
Foreign investors have been attracted to Nigeria’s financial markets by relatively high interest rates, ongoing foreign exchange reforms and improving investor confidence.
The resulting inflows have increased the availability of foreign exchange and provided some support for the naira.
However, the bank cautioned that the benefits could come with considerable risks because portfolio investments, often described as “hot money”, can be withdrawn quickly when market conditions deteriorate.
Unlike foreign direct investment (FDI), which typically involves establishing businesses, factories and other long-term operations, portfolio investment is concentrated in financial assets such as government securities, equities and other market instruments.
Such investments are generally more sensitive to changes in global interest rates, geopolitical developments and shifts in investor sentiment.
A sudden reversal could therefore trigger capital outflows, weaken foreign exchange liquidity and place additional pressure on Nigeria’s reserves and currency.
Despite the concerns, Quest Merchant Bank highlighted several positive developments in Nigeria’s external position.
Foreign direct investment liabilities increased by $6.7 billion year-on-year, indicating stronger foreign participation in Nigerian businesses and potentially reflecting improved confidence in the economy.
The bank noted that FDI is generally considered more stable than portfolio investment because it represents longer-term commitments to productive assets and business operations.
Nigeria also strengthened its financial buffers during the period, with reserve assets increasing by $5.6 billion compared with the previous year.
The improvement gives the country greater capacity to manage external shocks and support stability in the foreign exchange market.
In addition, Nigerian investments abroad, including direct investments, portfolio holdings and other foreign assets, increased by a combined $3.3 billion, although the contribution remained relatively modest compared with the rise in foreign claims on Nigeria.
Quest Merchant Bank nevertheless urged policymakers to remain cautious about the country’s growing dependence on portfolio inflows.
Higher interest rates in advanced economies, worsening global uncertainty or a decline in investor confidence could encourage foreign investors to repatriate funds, putting renewed pressure on the naira and foreign reserves.
The bank, however, maintained a positive outlook for Nigeria’s external position, particularly if international crude oil prices remain strong.
Sustained higher oil prices could boost export earnings, increase foreign exchange inflows and support further reserve accumulation.
The report ultimately underscores the need for Nigeria to attract more long-term productive investments while reducing excessive dependence on volatile portfolio flows.
Building a stronger mix of foreign capital will be crucial to improving economic resilience and shielding the country from future global financial disruptions.
