An Investigation of FDI Inflows and Their Influence on Exchange Rate Stability in Nigeria
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Background of the Study
Exchange rate stability is critical for maintaining investor confidence and facilitating international trade. In Nigeria, exchange rate fluctuations have been a persistent challenge, often linked to macroeconomic instability and volatile capital flows. FDI, as a source of long-term capital, is believed to play a stabilizing role by providing a steady inflow of foreign currency and enhancing the overall financial market environment (Oluwaseun, 2023). By contributing to foreign exchange reserves and reducing reliance on volatile short-term capital, FDI can influence the stability of the national currency.
Empirical evidence from emerging economies suggests that countries with higher levels of FDI tend to experience less exchange rate volatility, as foreign investments signal confidence in the domestic economy. In Nigeria, however, the relationship is complex due to the interplay of factors such as oil price fluctuations, monetary policy responses, and external debt levels (Akinola, 2024). Recent policy reforms aimed at liberalizing the financial sector and improving the investment climate have attracted increased FDI, yet the extent to which these inflows have contributed to exchange rate stability remains under-researched (Ibrahim, 2025).
This study seeks to investigate the influence of FDI inflows on exchange rate stability by analyzing historical exchange rate data, FDI patterns, and monetary policy interventions. The objective is to determine whether higher FDI inflows correlate with a more stable exchange rate regime and to identify the mechanisms through which FDI may mitigate currency volatility. The findings will provide valuable insights for central banks and policymakers tasked with maintaining exchange rate stability in a volatile global economic environment.
Statement of the Problem
Nigeria continues to experience significant exchange rate volatility despite efforts to attract long-term FDI. While FDI is theoretically capable of stabilizing the currency by enhancing foreign exchange reserves and fostering investor confidence, practical outcomes have been inconsistent (Chinwe, 2023). Factors such as global commodity price fluctuations, domestic policy uncertainties, and external debt burdens interact with FDI inflows, complicating their impact on exchange rate stability. Furthermore, the benefits of FDI may be offset by speculative capital movements that exacerbate currency fluctuations rather than stabilize them.
The problem is particularly acute in an economy like Nigeria’s, where reliance on oil revenues and structural inefficiencies in the financial sector contribute to cyclical exchange rate shocks. The disconnect between FDI inflows and the desired stabilization of the currency raises important questions about the effectiveness of current economic policies and the overall resilience of the Nigerian economy to external shocks. Inadequate coordination between monetary policy and FDI promotion strategies further undermines the potential stabilizing effects of foreign investments. This study, therefore, aims to identify the conditions under which FDI inflows can contribute to exchange rate stability, and to propose policy measures that enhance the positive impacts of FDI on the national currency.
Objectives of the Study
• To analyze the relationship between FDI inflows and exchange rate stability in Nigeria.
• To identify key factors that moderate the impact of FDI on currency stability.
• To recommend policy interventions to optimize the stabilizing effects of FDI on the exchange rate.
Research Questions
• How do FDI inflows affect the stability of the Nigerian exchange rate?
• What moderating factors influence the relationship between FDI and exchange rate volatility?
• Which policy measures can enhance the positive impact of FDI on exchange rate stability?
Research Hypotheses
• H1: Higher FDI inflows are associated with reduced exchange rate volatility in Nigeria.
• H2: External factors such as global commodity prices moderate the relationship between FDI and exchange rate stability.
• H3: Integrated monetary policies that complement FDI promotion improve exchange rate stability.
Scope and Limitations of the Study
This study employs macroeconomic data on exchange rates and FDI from Nigerian central bank reports and international databases over the past decade. Limitations include data inconsistencies, the influence of global economic shocks, and challenges in isolating the impact of FDI.
Definitions of Terms
• Exchange Rate Stability: The degree to which the national currency maintains a consistent value relative to foreign currencies.
• FDI Inflows: Investments made by foreign entities into the domestic economy.
• Currency Volatility: The extent of fluctuations in the value of the national currency.
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