Nigeria’s economy is facing renewed pressure as the sustained decline in crude oil prices threatens to undermine government revenue, foreign exchange inflows, and fiscal stability.
With Bonny Light crude oil, the country’s key export grade, hovering close to the $60 per barrel mark, policymakers are bracing for tighter conditions that could test the resilience of Africa’s largest economy.
As the world’s 11th-largest oil exporter, Nigeria remains heavily dependent on petroleum revenues to finance imports, fund its budget, and sustain foreign reserves.
Official data show that crude oil accounts for nearly 80 per cent of export earnings and about half of government revenue, underscoring the economy’s vulnerability to oil market shocks.
The recent softness in oil prices, which was triggered by global economic uncertainty, sluggish demand, and rising supply from OPEC+ and non-OPEC producers, has sparked concern in Abuja.
If the trend continues and Bonny Light dips below $60 per barrel, Nigeria could face a steep decline in dollar inflows that would pressure the naira, deplete reserves, and widen fiscal deficits.
The implications are far-reaching. Reduced dollar supply from oil exports could limit the Central Bank of Nigeria’s (CBN) ability to manage foreign exchange volatility and meet import demand, especially in critical sectors like energy, manufacturing, and food.
“The Nigerian economy is still largely tied to the fortunes of oil,” said Prof. Chijioke Nwokoye, a fiscal policy expert at the University of Lagos.
“Every dollar decline in oil prices chips away at our fiscal balance. When prices fall below $65, the government begins to feel the pinch.
“Below $60, it becomes difficult to meet recurrent obligations without resorting to more borrowing.”
The Central Bank has spent much of 2025 navigating exchange rate instability amid fluctuating oil receipts.
Although recent reforms have sought to unify exchange windows and restore investor confidence, declining oil earnings threaten to undo these gains.
With foreign reserves already under pressure, the CBN’s capacity to defend the naira through market interventions could weaken significantly.
Analysts warn that this may trigger a new wave of currency depreciation, higher import costs, and renewed inflationary pressures.
“The CBN has been walking a tightrope,” said Dr. Tunde Akinola, an economist at the Centre for Energy Studies.
“Their recent interventions were supported by modest oil inflows earlier in the year. But if oil prices stay below $60, those inflows dry up, and the naira will once again come under severe pressure.”
The apex bank’s strategy of allowing market forces to play a larger role has improved transparency but also exposed the economy to sharper swings in investor sentiment.
A fall in crude prices could reduce foreign investor confidence and slow portfolio inflows—an outcome that would exacerbate dollar scarcity.
At the fiscal level, the federal government is already grappling with limited revenue and high debt service costs.
A prolonged period of weak oil prices could further shrink fiscal space, undermining spending on infrastructure, social programs, and debt obligations.
The 2025 budget, which is anchored on optimistic oil revenue projections, could face significant shortfalls if the current trend persists.
Lower oil receipts would force the government to either cut spending, increase borrowing, or seek emergency financing, each carrying economic and political trade-offs.
Akinola explained, “Nigeria’s budget assumptions are vulnerable to oil market volatility.
“If oil prices remain subdued, we could see larger fiscal deficits, delayed capital projects, and even a review of the Medium-Term Expenditure Framework (MTEF).”
Indeed, the MTEF, a three-year fiscal strategy document that guides government spending and revenue targets, may require downward revisions to reflect the new oil realities.
Such an adjustment would likely impact infrastructure funding, debt repayment schedules, and social welfare initiatives.
Nigeria’s debt service-to-revenue ratio, one of the highest in emerging markets, leaves little room for fiscal maneuver.
According to the Debt Management Office (DMO), more than 70 per cent of federal revenue is currently used to service debts.
A further decline in oil prices could push that ratio higher, eroding funds available for critical development projects.
“If oil revenues fall and borrowing increases, Nigeria risks sliding into a debt trap,” warned Prof. Nwokoye.
“The government may need to explore alternative financing models, such as public-private partnerships and tax reforms, to avoid unsustainable debt accumulation.”
The combination of lower oil prices, higher borrowing needs, and weaker investor confidence could also drive up sovereign risk premiums, making external borrowing more expensive.
This scenario could complicate the government’s plan to finance the budget deficit through a mix of domestic and external sources.
A weaker naira, fueled by reduced oil earnings, would likely push up the cost of imported goods and services, compounding inflationary pressures that already exceed 27 per cent. Households could face higher prices for fuel, food, and transportation, while businesses grapple with rising production costs.
The ripple effects could slow economic growth and strain consumer spending—factors that would further weaken fiscal revenues.
Analysts caution that this combination of low oil prices, weak currency, and high inflation could recreate the conditions of 2016–2017, when Nigeria slipped into recession following a similar oil price shock.
“The lesson from the last downturn is clear,” said Akinola. “When oil prices fall, Nigeria’s entire economic framework shakes. Unless we accelerate non-oil revenue generation, we risk repeating history.”
Successive governments have pledged to diversify Nigeria’s economy away from oil, yet progress has been slow.
Non-oil exports remain marginal, and the manufacturing sector continues to struggle with infrastructure gaps, power shortages, and policy uncertainty.
Experts argue that the current oil price slump should serve as a wake-up call to accelerate diversification efforts, particularly in sectors like agriculture, solid minerals, and gas-based industries.
Expanding domestic refining capacity, they add, could also help reduce dependence on imported petroleum products and conserve foreign exchange.
“Energy transition is coming, and oil will not remain the lifeline forever,” said Nwokoye. “Nigeria must use this period of price weakness to rethink its fiscal model, strengthen non-oil exports, and deepen local value addition.”
To mitigate the risks from falling oil prices, experts recommend a combination of short-term stabilization measures and long-term structural reforms.
These could include tightening fiscal discipline, improving tax administration, curbing oil theft, and enhancing local production efficiency.
The government may also need to recalibrate its foreign exchange policy, allowing for more flexibility to absorb external shocks without depleting reserves.
On the fiscal front, prioritizing capital projects with high economic multipliers could help sustain growth even under reduced oil revenues.
(Independent)
