The Impact of FDI Growth on Exchange Rate Fluctuations in Nigeria
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Background of the Study
Exchange rate fluctuations are a key indicator of an economy’s external stability and competitiveness. In Nigeria, where the economy is sensitive to global oil prices and external shocks, Foreign Direct Investment (FDI) plays an influential role in shaping exchange rate dynamics. FDI inflows can strengthen the domestic currency by increasing the capital base and boosting investor confidence; however, if FDI is volatile or accompanied by profit repatriation, it may contribute to depreciation pressures (Ibrahim, 2023). The relationship between FDI growth and exchange rate movements is further complicated by the interplay of monetary policy, fiscal deficits, and global economic conditions (Chukwu, 2024).
Recent policy measures aimed at attracting FDI have sought to stabilize the currency by creating a favorable investment environment and promoting long-term capital flows (Afolabi, 2025). However, the net effect of FDI on exchange rate stability remains ambiguous. This study will analyze historical data on FDI inflows and exchange rate movements in Nigeria from 2020 to 2024 to determine whether increased FDI contributes to a more stable currency or if its benefits are offset by factors such as external shocks and repatriation practices.
Statement of the Problem
Despite efforts to attract FDI as a means to stabilize the domestic currency, Nigeria continues to experience significant exchange rate volatility. The core problem is that the expected positive impact of FDI on the exchange rate is often undermined by factors such as profit repatriation, global commodity price fluctuations, and inconsistent monetary policies (Ibrahim, 2023). This volatility creates uncertainty for businesses and undermines investor confidence. Moreover, the concentration of FDI in certain sectors may not produce broad-based improvements in the capital account, limiting its ability to influence exchange rate stability (Chukwu, 2024).
Addressing this problem requires a detailed examination of the channels through which FDI impacts exchange rates and an assessment of the conditions under which FDI contributes to currency appreciation or depreciation. This study aims to fill this gap by analyzing empirical data and reviewing policy measures, ultimately providing recommendations for enhancing the stabilizing effect of FDI on Nigeria’s exchange rate (Afolabi, 2025).
Objectives of the Study
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To assess the impact of FDI growth on exchange rate fluctuations in Nigeria.
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To identify factors that moderate the relationship between FDI and currency stability.
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To propose policy recommendations to reduce exchange rate volatility.
Research Questions
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How does FDI growth influence exchange rate movements in Nigeria?
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What factors moderate the relationship between FDI and exchange rate stability?
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How can policy reforms enhance the stabilizing impact of FDI on the domestic currency?
Research Hypotheses
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FDI growth is positively associated with exchange rate stability when profit repatriation is minimized.
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External shocks significantly moderate the relationship between FDI and exchange rate fluctuations.
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Strengthening monetary policy frameworks will enhance FDI’s positive impact on currency stability.
Scope and Limitations of the Study
The study covers Nigeria’s FDI and exchange rate data from 2020 to 2024. Limitations include global economic influences and data lags in exchange rate reporting.
Definitions of Terms
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Exchange Rate Fluctuations: Variations in the value of a country’s currency relative to others.
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FDI Growth: The increase in foreign direct investment inflows over time.
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Profit Repatriation: The process by which foreign investors transfer profits back to their home countries.
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