AfrikanTrust
Nigeria’s economy has long danced to the rhythm of oil markets. But with Brent crude slumping by over $10 per barrel to settle at $64.90, Africa’s largest oil producer finds itself on increasingly slippery ground. The sudden drop in oil prices—driven by growing fears of a US-China trade war and a surprise output hike by key OPEC+ members—comes as a rude shock to a country whose entire fiscal architecture rests on the promise of petroleum dollars.
President Bola Tinubu’s 2025 national budget is predicated on a $75 per barrel benchmark and an ambitious production target of 2.06 million barrels per day (bpd). Both assumptions now appear overly optimistic. Nigeria’s current output struggles to hit 1.4 million bpd due to rampant pipeline vandalism, oil theft, and declining investment in upstream assets. With Brent prices plunging, the fiscal math is unraveling fast.
Nigeria earns over 90% of its foreign exchange and 60% of government revenue from oil. The latest slump in crude prices thus threatens to derail plans for infrastructure investment, healthcare, education, and subsidy relief initiatives. Analysts warn that the country may be forced to borrow more or cut spending—both risky options for an economy already mired in debt and fiscal deficits.
The oil price dip follows OPEC+’s surprise decision to increase production starting May. Eight member countries, including Saudi Arabia and Russia, agreed to ease voluntary output cuts amounting to 2.2 million bpd, adding an extra 411,000 bpd to the market. Coupled with weak demand forecasts due to potential trade retaliation from China against the US, global oil prices are trending downward.
This is particularly dangerous for Nigeria, which lacks the buffer of diversified exports or robust reserves to shield itself from oil volatility. While other producers can withstand temporary revenue slumps, Nigeria’s over-dependence on crude exports leaves it severely exposed. As oil earnings dwindle, Nigeria’s external reserves—hovering around $32 billion—are under growing strain. The Central Bank of Nigeria (CBN) has attempted to unify the Naira’s multiple exchange rates and liberalize the forex market, but the results have been mixed.
The naira has continued its downward spiral, trading at about ₦1,350 to the US dollar in the parallel market, compared to an official rate of around ₦1,200. The currency crisis has fueled inflation, which stands at over 31%, eroding purchasing power and heightening social tensions. The fall in oil prices means fewer dollars flow into the CBN’s coffers, tightening liquidity in the foreign exchange market. Importers of essential goods—including food, fuel, and pharmaceuticals—face mounting difficulties accessing forex, further stoking inflation and supply chain bottlenecks.
Despite being a top oil producer, Nigeria imports nearly all of its refined petroleum products due to non-functional domestic refineries. The country spends over ₦1.2 trillion monthly on petrol imports—an unsustainable burden made worse by the weak Naira and global oil volatility. The removal of fuel subsidies in 2023 was intended to reduce fiscal pressure, but the ensuing spike in pump prices sparked public discontent and failed to stem the outflow of funds. The ongoing refinery rehabilitation projects—particularly the Dangote Refinery—have yet to significantly ease the pain.
Nigeria’s balance of payments has deteriorated, reflecting lower export receipts and higher import bills. The current account deficit widened to 3.7% of GDP in 2024, and is projected to worsen if oil prices remain subdued. Foreign direct investment (FDI) remains low, deterred by policy inconsistencies, insecurity, and currency risks.
Remittances—once a key source of foreign exchange—have also slowed, as diaspora Nigerians grapple with inflation and interest rate hikes in Europe and North America. The International Monetary Fund (IMF) and World Bank have both advised Nigeria to prioritize revenue diversification and institutional reforms to weather these headwinds.
Nigeria faces a perfect storm. Falling oil prices, fragile fiscal health, soaring inflation, and a weakening Naira are some of the most pressing challenges the country faces. Policymakers must now rethink the economic blueprint. Experts urge the government to take several key making true its promise to diversify the country’s economy. Development of local capacities in Agric production, manufacturing, tech, and services must be scaled up to reduce dependence on oil. In this relation, policies to effectively support SMEs, boost exports, and attract FDI must be conceived and implemented. Refinery rehabilitation, modular refineries, and local content development in oil and gas must be prioritized to reduce the import bill.
In terms of monetary policy reforms, the country’s Central Bank must address inflation and stabilize the Naira by tightening monetary policy and ensuring greater transparency in forex allocation. Wasteful spending needs to be curbed and a medium-term expenditure framework focused on efficiency and debt sustainability is urgently needed.
While crude oil theft, pipeline sabotage, and general insecurity continue to undermine growth and investor confidence, a strategic overhaul of the security architecture is necessary.
Nigeria will likely continue to struggle with limited fiscal space, a depreciating Naira, and inflationary pressures in the immediate future. Global oil markets may remain bearish unless geopolitical tensions flare or demand from Asia rebounds. If Brent crude stabilizes below $70, Nigeria may revise its budget assumptions mid-year, possibly through a supplementary budget or emergency borrowing.
In the medium term however, economic recovery will depend on domestic reforms. If refinery projects come online, and if the government manages to attract investment into non-oil sectors, Nigeria could slowly regain its footing. However, without serious fiscal and structural reforms, the economy risks stagnation—or worse, slipping back into recession.
Nigeria’s over-reliance on oil is once again proving to be a double-edged sword. The latest slump in crude prices underscores the urgent need for a strategic rethink. As global oil dynamics shift and domestic pressures mount, Nigeria must confront its economic vulnerabilities head-on—or risk being left behind in an increasingly competitive global economy.
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