An Examination of FDI Inflows and Their Impact on Interest Rate Policies in Nigeria
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Background of the Study
Interest rate policies are a cornerstone of monetary policy, influencing investment, consumption, and overall economic stability. In Nigeria, the influx of Foreign Direct Investment (FDI) can affect interest rate policies by altering the supply of capital and influencing investor sentiment. FDI may contribute to a lower cost of capital and stimulate lending if it enhances the overall investment climate (Ibrahim, 2023). Conversely, if FDI leads to increased capital outflows through profit repatriation or heightened external vulnerability, it may pressure central banks to adjust interest rates to stabilize the economy (Chukwu, 2024).
The relationship between FDI inflows and interest rate policies in Nigeria is complex, as it depends on multiple factors such as the overall financial market structure, the behavior of domestic banks, and the effectiveness of monetary transmission mechanisms. Recent monetary policy adjustments have been influenced by both domestic economic conditions and external capital flows, including FDI (Afolabi, 2025). This study aims to examine how FDI inflows interact with interest rate policies by analyzing macroeconomic data from 2020 to 2024 and reviewing central bank policy statements. The research will investigate whether FDI acts as a stabilizing force in the financial system or if it contributes to interest rate volatility, providing insights for more responsive monetary policy formulation.
Statement of the Problem
Despite expectations that FDI inflows should contribute to lower interest rates by increasing the available pool of capital, Nigeria’s experience has been mixed. There are instances where robust FDI inflows have not corresponded with expected reductions in interest rates, suggesting that other factors may be at play. The core problem is to determine whether FDI exerts a direct, stabilizing influence on interest rate policies or if external shocks and domestic financial market imperfections dilute this effect (Ibrahim, 2023). Fluctuations in FDI, coupled with profit repatriation and capital flight concerns, may lead to increased volatility in interest rate settings, complicating the central bank’s policy response (Chukwu, 2024).
This study seeks to understand the channels through which FDI interacts with interest rate policy in Nigeria and to identify the structural factors that influence this relationship. Addressing this problem is critical for ensuring that monetary policy is calibrated to account for the dynamic influences of external capital flows. The research will provide a detailed analysis of the impact of FDI on interest rate trends and explore whether policy reforms are needed to enhance the stability of the monetary system (Afolabi, 2025).
Objectives of the Study
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To examine the impact of FDI inflows on interest rate policies in Nigeria.
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To identify the structural factors moderating this relationship.
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To propose policy recommendations to improve the responsiveness of interest rate settings to FDI dynamics.
Research Questions
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How do FDI inflows affect interest rate policies in Nigeria?
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What structural factors influence the relationship between FDI and interest rate volatility?
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How can monetary policy be adjusted to better incorporate the effects of FDI?
Research Hypotheses
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FDI inflows are associated with lower interest rates when financial market conditions are favorable.
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Structural weaknesses in the domestic financial system moderate the impact of FDI on interest rates.
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Policy interventions that strengthen monetary transmission mechanisms will enhance the stabilizing effect of FDI on interest rate policies.
Scope and Limitations of the Study
The study focuses on Nigeria’s monetary policy and FDI data from 2020 to 2024. Limitations include external economic shocks and lags in data reporting.
Definitions of Terms
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Interest Rate Policies: Central bank decisions regarding the cost of borrowing money.
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Monetary Transmission Mechanism: The process through which monetary policy changes affect the economy.
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FDI Inflows: Investments made by foreign entities in domestic economic sectors.
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