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As IMF warns on hot money risks

Nigeria’s net foreign exchange inflows have surged nearly tenfold in the past five years on reform gains, reflecting stronger foreign exchange liquidity, rising investor confidence and improved external buffers, but the International Monetary Fund (IMF) has warned that the country remains overly reliant on volatile foreign portfolio investments.

Data from the Central Bank of Nigeria (CBN) showed that net foreign exchange inflows into the economy rose from $0.95 billion in 2022 to $9.22 billion in January 2026, representing an increase of about 871 percent over the period.

The sharp increase in inflows comes amid sweeping economic reforms that have improved confidence in Nigeria’s foreign exchange market and strengthened the country’s external position.

However, in its latest Article IV consultation report on Nigeria, the IMF cautioned that the gains could prove vulnerable if the country continues to depend heavily on short-term foreign portfolio flows, commonly referred to as “hot money”.

The Fund commended reforms implemented over the past three years, noting that they have strengthened macroeconomic stability and improved resilience. Nonetheless, it urged policymakers to pursue a more sustainable mix of capital inflows.

“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 at a time when foreign portfolio investments dominate capital inflows into Africa’s fourth largest economy.

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

Analysts at Quest Merchant Bank described the performance as unprecedented.

“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 inflow momentum has been supported by attractive domestic yields, improved exchange rate stability and growing confidence in ongoing economic reforms.

CBN data showed that foreign exchange inflows strengthened significantly at the beginning 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 Nigeria’s external buffers and foreign reserve position.

Nigeria’s external reserves climbed to a 17-year high of $50.88 billion as of June 16, 2026, compared with $37.82 billion a year earlier, representing an increase of 34.53 percent.

According to the Fund, gross international reserves reached $46 billion at the end of 2025, equivalent to 157 percent of its Assessment of Reserve Adequacy (ARA) metric, exceeding the 100-150 percent range generally considered adequate for precautionary purposes.

Despite the stronger reserve position, the IMF warned that a significant portion of foreign investor holdings remains concentrated in high-yield Open Market Operation (OMO) instruments, exposing the economy to rollover risks should global market conditions deteriorate.

“Large foreign holdings of OMOs represent roll-over risks and carry elevated yields,” the Fund said.

The IMF said policy priorities should include gradually reducing reliance on OMO-related investments, encouraging foreign investors to diversify into other domestic assets such as government securities and equities, broadening sources of foreign exchange earnings, strengthening remittance inflows through official channels and accelerating structural reforms capable of attracting more stable foreign direct investment (FDI).

The Centre for the Promotion of Private Enterprise (CPPE) shared the IMF’s concerns over the composition of Nigeria’s inflows.

Muda Yusuf, chief executive officer of CPPE, said foreign portfolio investments remain highly sensitive to changes in global financial conditions and investor sentiment.

According to the private sector advocacy group, long-term external sector resilience should be anchored on stronger exports, higher productivity, increased foreign direct investment and a more competitive domestic economy rather than short-term capital flows.

“Hot money can stabilise an economy temporarily; productive investment is what transforms it permanently,” the group said.

Analysts note that while the surge in foreign exchange inflows has helped improve liquidity in the market, strengthen reserves and support exchange rate stability, sustaining the gains will depend on Nigeria’s ability to attract more durable sources of foreign capital and expand non-oil foreign exchange earnings.

The IMF’s assessment suggests that the next phase of reforms should focus less on attracting yield-seeking capital and more on creating conditions that encourage long-term investments capable of generating jobs, boosting exports and strengthening the country’s external position over time.