The Naira’s Floating Exchange Rate Regime: Capital Flows and Investment Implications

Nigeria's adoption of a floating exchange rate regime in 2016 marked a pivotal shift in its cur- rency policy, with significant implications for capital flows and investment. This paper examines how the transition from a de facto peg of the Naira to a more flexible exchange rate has affected foreign capital inflows and investment behavior. We outline key research questions on whether a floating Naira has attracted short term portfolio investments or deterred long term foreign direct investment (FDI), and we hypothesize divergent effects on these capital flow components. Using econometric analysis on data from 2000-2021, we employ time series models to assess changes in capital inflows before and after the float, controlling for global push factors and domestic eco- nomic conditions. The results indicate that the post-2016 floating regime coincided with a surge in volatile portfolio inflows (notably into equities and money markets) but a short run decline in FDI (as a share of GDP). These findings contribute to exchange rate theory by highlighting the trade off between exchange rate flexibility and investment stability. Policy implications suggest that while a float can restore investor confidence in the currency's price mechanism, complementary measures are needed to attract stable, long term investment. KEYWORDS: Naira, Floaating exchange rate, Capital flows, Foreign direct investment, Portfolio investment, Nigeria Bibliography • Adeoye, B. W., & Atanda, A. A. (2012). Exchange Rate Volatility in Nigeria: Consistency, Persistency & Severity Analyses. CBN Journal of Applied Statistics, 2(2), 29-49. • Busse, M., Hefeker, C., & Nelgen, S. (2010). Foreign Direct Investment and Exchange Rate Regimes. MAGKS Joint Discussion Paper Series, No. 2010-15, Philipps-Univ. Marburg. [5] • Copley, A. (2016, May 27). Nigeria introduces dual exchange rate regime. Brookings - Africa in Focus. [1] • Eregha, P. B. (2019). Exchange Rate Regimes, Capital Inflows and Domestic Investment in WAMZ. African Development Review, 31(1), 88-99. • International Monetary Fund (2016). Nigeria: 2016 Article IV Consultation Selected Issues. IMF Country Report No. 16/102. [25][26] • Jibir, A., & Abdu, M. (2017). Foreign Direct Investment-Growth Nexus: The Case of Nigeria. European Scientific Journal, 13(1), 17- 34. • Journal of the Saudi Heart Association (2019). Author Guidelines: Original Articles. (Guideline stating "Include 3-6 keywords following the abstract"). [27] • Olowookere, A. (2017). Exchange Rate Misalignment and Stock Market Performance in Nigeria. Nigerian Journal of Securities Market, 2(1), 15-29. [11][28] Oshikoya, T. (2016, April 15). The IMF on Nigeria's net capital flows mirage. BusinessDay Analysis. [17][9] • Osinubi, T. S., & Amaghionyeodiwe, L. A. (2009). Foreign Direct Investment and Exchange Rate Volatility in Nigeria. International Journal of Applied Econometrics and Quantitative Studies, 6(2), 83- 116. • Oyegoke, E. O., & Aras, O. N. (2021). Impact of Foreign Direct Investment on Economic Growth in Nigeria. Journal of Management, Economics, and Industrial Organization, 5(1), 31-38. [29] [30] • World Bank (2022). World Development Indicators. (Foreign Direct Investment inflows and GDP data for Nigeria). [13][18]