The Impact of Monetary Policy on Foreign Direct Investment in Nigeria: An Empirical Analysis (1990–2023)

Abstract

This study examines the relationship between monetary policy variables and Foreign Direct Investment (FDI) inflows in Nigeria over 1990–2023 (34 annual observations). Unit-root tests (including the Zivot-Andrews test, which allows for an unknown structural break) confirm that FDI, the exchange rate, money supply, and GDP are non-stationary in log levels, while the interest rate is stationary. A standard ARDL bounds test, which assumes one fixed long-run relationship across the entire sample, finds no statistical evidence of cointegration (F-statistics of 1.2–3.0 across specifications, below the relevant lower bounds). However, a Gregory-Hansen regime-shift cointegration test — which allows the long-run relationship itself to shift once at an unknown date — finds strong evidence of cointegration once a break in 2013 is permitted (ADF* = -5.71, significant at the 5% level against Gregory and Hansen's, 1996, critical values). The long-run elasticity of FDI with respect to the exchange rate is approximately -1.0 before 2013 and approximately -3.3 after; the elasticity with respect to money supply rises correspondingly from approximately 1.0 to 2.8. This is consistent with Nigeria's post-2013 experience of oil-price collapse, recession, and repeated currency devaluations, which appear to have shifted rather than simply disrupted the long-run relationship between monetary conditions and FDI. A well-diagnosed short-run model separately confirms that a 1% naira depreciation is associated with an approximate 1.15% reduction in FDI in the same year (p = 0.002), and a 1% increase in money supply with an approximate 2.09% increase (p = 0.009); a Toda-Yamamoto Granger causality test, however, finds no significant lagged predictive causality from either variable to FDI, indicating that the relationship is better described as a strong contemporaneous association than as an established causal lag structure. Together these results support treating exchange-rate stability and monetary-liquidity management as significant, but regime-dependent, correlates of Nigeria's FDI performance, and argue for caution before asserting a single, time-invariant causal mechanism.