Impact of Macroeconomic Determinants on Foreign Portfolio Investment in Nigeria

Abstract

Foreign capital inflows, including foreign portfolio investments (FPI), significantly contribute to filling Nigeria's domestic saving gap and are important sources of capital formation, technological development, innovative capacity, skills building, and organizational improvements. However, exchange rate fluctuations have controversially impacted FPI flows. Some studies found exchange rate changes increased Nigerian FPI, while others determined a negative relationship. This study examined macroeconomic determinants of FPI in Nigeria from 2011-2022 using quarterly data. Applying OLS modeling after confirming variables were integrated at levels and first differences, results showed exchange rates, inflation, and GDP significantly influenced FPI flows. Specification tests validated model stability. Analysis revealed exchange rate fluctuations substantially drove capital inflow and divestment decisions. Suggesting exchange rate uncertainty discourages long-term FPI, findings imply the need for fiscal policies supporting security and business environment certainty to attract foreign investors. Additionally, raising benchmark interest rates above inflation could ensure positive real returns and promote investments. Overall, creating macroeconomic stability through coordinated fiscal, monetary, and exchange rate policies appears critical for Nigeria to reap the development benefits of sustained foreign portfolio inflows. It therefore, suggested that, Fiscal Authority should create an enabling environment, especially by providing adequate security in the country in order to attract and retain foreign investors in Nigeria. Also, the monetary authority should increase the interest rate (MPR) which is the anchor rate in order to have positive rate of return after considering the rate of inflation in the country. In conclusion, the study recommended for further study especially on foreign direct investment in Nigeria.