Nigeria’s Turnaround: Make or Break for Africa’s Reform Wave
Author: Siddhi Munjal (Research Executive)
Authors Note (May 2025): Since this article was originally written in December 2024, several developments have affirmed the policy directions this article had proposed: particularly the urgent need for refinery expansion and a reduction in petrochemical imports. In 2025, three new refineries, Eghudu Refinery Limited in Edo State (100,000 barrels per day), MB Refinery and Petrochemicals Company Limited in Delta State (30,000 barrels per day), and HIS Refining and Petrochemical Company Ltd in Abia State (10,000 barrels per day), have been licensed to operate. Additionally, the Nigerian Upstream Petroleum Regulatory Commission declared that export permits would be denied to oil producers who fail to meet domestic refinery supply quotas, a move designed to guarantee crude availability for local refining. To reinforce these efforts, the Federal Government announced the establishment of a National Strategic Petroleum Reserve to protect the economy from global oil market disruptions. As of May 2025, Nigeria has repaid its great $USD 3.6 Billion debt to the IMF; a promising sign that the bold economic reforms detailed below are starting to bear fruit. These strides mark significant progress in Nigeria’s shift toward energy self-sufficiency and downstream integration and an overall economic turnaround, echoing the reform imperatives laid out in this piece.
Overview
For almost a semi-centennial, Nigeria's resource-“rich” economy has been stifled by chaotic multi-rate forex systems, bureaucratic corruption and oil-fueled complacency. The obvious result? Arbitrage schemes that make big pockets heavier, crushing poverty, ballooning government deficits and our favourite, stagflation.
But now, the gap between the official and black-market exchange rates after decades of dysfunction ends with the introduction of a single floating exchange-rate regime (2023). To continue this bold restructuring, regressive petrol subsidies - often the cash cow for the elite - have been slashed, and the government now aims to diversify, pivoting away from oil-export reliance, ending Nigeria’s resource curse.
The Evolving Exchange Rate System
Nigeria's multi-rate exchange system evolved from a fixed USD peg to multiple market-driven forex markets over the years. In 2016, Nigeria balked at adopting a fully floating exchange rate, fearing that volatile oil prices would weaken the Nigerian currency, Naira, and lead to higher inflation driven by costly imports. This policy inaction created an arbitrage playground for the elite to purchase dollars - earned through oil export - cheaply at government-set rates (where the Naira is appreciated) and resold them for massive gains on the depreciated black-market, costing the government a stupefying $0.38 for every dollar of oil export revenue they earned (Financial Times, 2024).
The following diagram depicts an apt summary of this turbulent evolution:
Source: CBN, NUS Economics Society Framing
The 2023 forex unification into the Nigerian Foreign Exchange Market (NFEM) was set to eliminate inefficiencies. However, this reform wasn't painless, as the depreciated Naira drove up import costs. Inflation soared to 33.9% by October 2024, with food inflation hitting a crippling 39.2%. On a brighter note, the unification eliminated the hidden tax on agricultural and manufacturing exporters as they used to earn lesser Nairas for export-earned dollars at the government-set appreciated rates rather than the true market value.
Post-reform, the unified forex regime helped raise forex reserves by nearly 16% within just a few months (from $32.9 billion to $38.3 billion), suggesting improved confidence in Nigeria’s external accounts. This helps to now provide a buffer against currency volatility, helping to defend the Naira when import costs rise or when global oil prices fluctuate. However, while the unified rate improved the reserves by 16%, the standard deviation of the naira surged from 1.71 to 11.91 post-unification, underscoring the great yet expected instability and volatility in the currency (Oniyide et al., 2024).
Source: International Journal on Economics, Finance and Sustainable Development (IJEFSD)
Nigeria’s historical use of managed floats (e.g., 2017 Investors’ & Exporters’ window) suggests a hybrid approach could stabilize the Naira without reinstating distortionary tiers.
Historic Oil Dependency Dilemma
Yet, Nigeria’s oil addiction lingers, with GDP growth still following crude prices, as shown below — underscoring the urgent need for diversification.
Source: NUS Economics Society
In 2016, oil prices collapsed as increased global production—especially from US shale oil—and continued high outputs from OPEC created an oversupplied market, while weak economic growth in key regions dampened demand. This mismatch between abundant supply and sluggish demand, compounded by market expectations of prolonged oversupply, drove prices sharply downward. Thus, in 2016, Nigeria's GDP contracted by approximately 1.6% as declining oil revenues and a rigid exchange rate system stifled economic activity.
Fuel Subsidy Removal
In the past, Nigerian gasoline producers and consumers alike were heavily reliant on massive fuel subsidies. By 2022, Nigeria was spending more than $10 billion each year on gasoline subsidies, accounting for nearly 24% of the federal budget. This heavy expenditure diverted essential funds away from key sectors like infrastructure, healthcare, and education.
But no more. The government has now axed the regressive petrol subsidies to repair fiscal deficits, while correcting the distorted market efficiency, the regressive nature of these subsidies which fed the elite and decreasing the pressure on forex reserves by the reduced demand of imported oil. But the cost? Catastrophic.
Petrol prices skyrocketed 167% overnight upon this declaration and by nearly 5 times over 2024 following the government’s decision to cut fuel subsidies and a slide in the naira currency, triggering deadly chaos with over 100 Nigerians dead in a fuel tanker explosion as they scrambled for petrol. While the short-term socio-economic consequences seem catastrophic, this policy is a step in the right direction. Existing literature suggests that the cut in regressive fuel subsidies will aid in helping reduce fiscal deficits and further improve foreign exchange stability in the long run.
Nigeria’s Future Outlook & Policy Recommendations:
Another economic disaster cannot be afforded. Maintaining a competitive exchange rate and rebuilding foreign reserves is of utmost importance to restore investor confidence and ensure macroeconomic stability. Nigeria must urgently pivot towards non-oil growth by revitalising its agriculture, manufacturing, and service sectors. These sectors have the potential not only to drive export-led growth but also to absorb the 2.5 million Nigerians entering the workforce each year, of whom less than 14% enjoy a predictable, fixed wage. Moreover, the World Bank (2024) reports that over 56% of Nigerians currently live below the poverty line.
Without sufficient job creation, Nigeria risks deepening its unemployment and poverty crises. In tandem, robust safety nets such as targeted cash transfers, school feeding programs, and subsidies on essential goods—like food and medical care—are vital to protect the country’s majority, poverty-stricken households from inflation’s harshest blows.
Ironically, despite being a major crude oil exporter, Nigeria remains a petrochemical importer due to underperforming refineries. To stabilise the Naira, Nigeria should adopt a dual-track strategy: in the short term, pursue downstream integration through investments in petrochemical refinery infrastructure to reduce import reliance and focus the supply of locally obtained oil on domestic refineries rather than export; in the long run, use the revenue generated to fund education, healthcare, and economic diversification efforts across other manufacturing industries, green industries, the service sector and tech-enabled services.
These high-stake gambles could potentially transform Nigeria’s fortunes, but failure to follow, and these gambles could set back the waves of economic reform across Africa.
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