The Centre for the Promotion of Private Enterprise (CPPE), has warned that except Nigeria adopts some pragmatic policy measures, the ongoing war in Iran could trigger inflation and exchange rate volatility which could hurt the country’s economy.
Over the weekend the United States of America and Israel launched airstrikes on Iran creating fear of global energy disruptions as the Middle East control the bulk of crude oil production.
CPPE in a policy brief entitled Implications of the Iran–U.S.–Israel conflict on the Nigerian economy, made available to newsmen on Sunday, said the conflict has injected a new wave of geopolitical risk into the global economy.
It said energy markets are the first transmission channel, noting that any disruption to the Strait of Hormuz, through which roughly 20 per cent of global crude oil supply is transported daily has immediate implications for global oil prices, shipping costs, insurance premiums, and supply chains. “For Nigeria, an oil-dependent economy where crude accounts for over 85 per cent of export earnings and about half of government revenue, the implications are significant”, the document signed by the Chief Executive Officer of the Centre, Dr MudaYusuf, said.
“The effects will be both positive and adverse, depending on the duration of the conflict and the quality of domestic policy responses.”
It said geopolitical tensions in the Middle East historically trigger sharp increases in crude oil prices due to fears of supply disruptions. “Even speculative risks around the Strait of Hormuz typically generate price volatility of $5–$15 per barrel within short periods”, CPPE said, adding that for Nigeria, every increase in crude oil price translates into additional export earnings and fiscal revenues.
Some of the benefits that can come from the conflict, according to CPPE, include higher crude export receipts, improved foreign exchange inflows, strengthening of external reserves, as well as ncreased FAAC allocations to all tiers of government
“However, revenue gains are critically dependent on production levels”, it observed adding that Nigeria’s current crude output has fluctuated around 1.4–1.6 million barrels per day, below installed capacity and vulnerable to oil theft, pipeline vandalism, and underinvestment in upstream infrastructure. “Without a sustained improvement in production efficiency and security, Nigeria may not fully optimise any price windfall”, CPPE said, adding that there is also a medium-term risk. “If the conflict escalates and dampens global growth, oil demand could weaken, leading to price corrections. The fiscal upside is therefore inherently fragile.”
CPPE listed some likely implications of the conflict for the exchange rate and capital flows. According to CPPE, higher oil prices typically strengthen Nigeria’s current account balance and improve foreign exchange liquidity. It noted that this could reduce short-term pressure on the naira and reinforce investor confidence.
“In recent years, exchange rate stability has been closely tied to oil receipts and capital inflows. “Improved export earnings could boost gross external reserves, enhance FX market liquidity, reduce speculative pressure on the currency.
“However, geopolitical instability also triggers global risk aversion. During periods of uncertainty, capital tends to migrate toward safe-haven assets such as U.S. Treasury securities and gold. “Emerging markets frequently experience portfolio outflows in such episodes. Given Nigeria’s relatively shallow capital market and sensitivity to foreign portfolio investment, volatility in global financial conditions could offset part of the FX gains from higher oil prices. The net exchange rate impact will therefore depend on the balance between stronger oil inflows and potential capital reversals”, it noted.
CPPE said the most immediate domestic risk lies in inflation transmission. It said Nigeria operates a deregulated downstream petroleum regime, higher international crude prices feed directly into higher petrol, diesel and aviation fuel costs. “This will lead to rise in pump prices, increased transportation/logistics costs, higher food distribution expenses, and escalating manufacturing and logistics costs”, it said.
“Energy costs have a strong multiplier effect in Nigeria’s inflation dynamics. Transportation and food prices account for a significant share of consumer expenditure. With purchasing power already fragile, sustained increases in fuel prices could intensify cost-of-living pressures and deepen poverty levels. Thus, while government revenues may rise, household welfare could deteriorate, creating a divergence between fiscal gains and social outcomes.”
CPPE recommends Nigeria should strengthen oil production capacity by intensifying anti-theft operations and incentivizing upstream investment to maximise output within OPEC limits. It also recommends that the government should build fiscal Buffers by channeling excess revenues into stabilization and sovereign savings frameworks. Other recommendations by the centre include, deepening of domestic refining to reduce vulnerability to imported refined products; enhance transparency and liquidity in the foreign exchange market to mitigate volatility; cushion vulnerable households against energy-driven inflation shocks, and expand non-oil exports, manufacturing, agro-processing, ICT, and services to reduce external vulnerability.
“The Iran–U.S.–Israel conflict represents a classic double-edged shock for Nigeria. Higher oil prices may strengthen fiscal and external balances in the short term. However, inflationary pressures, welfare deterioration, capital flow volatility, and global growth risks pose significant countervailing threats.
“The ultimate impact will depend less on external events and more on domestic policy discipline. Strategic savings, production efficiency, macroeconomic prudence, and structural diversification will determine whether Nigeria converts geopolitical turbulence into macroeconomic resilience”, it concluded.