Menu

Nigeria’s economic reform faces new threats 22 Apr 2025

Nigeria stands at a critical juncture, facing the dual challenges of implementing bold economic reforms and navigating an uncertain global landscape. The year 2025 has brought significant developments in Nigeria's energy sector and the broader economy, prompting a closer look at recent policy changes, the impact of the Dangote Refinery, efforts to tackle oil theft, and the political risks on the horizon.

One of the most transformative policy decisions in recent years has been the removal of fuel subsidies. This move, while necessary, has had immediate and severe consequences. For decades, fuel subsidies distorted Nigeria's economy, draining public finances and fostering corruption. Their removal, though painful, has introduced greater transparency in energy pricing, aligning fuel costs more closely with market rates. This shift lays the groundwork for a more sustainable economic structure and encourages investment in the energy sector. However, political pressures, potentially leading to the reintroduction of populist measures during the next electoral cycle, could see partial subsidy reinstatements as a ploy to garner votes. Such a reversal would undermine the progress made and destabilise the economy.

Compounding these challenges is the significant devaluation of Nigeria's currency, the naira, which has been on a downward trajectory since 2023. The naira's depreciation has had far-reaching implications for businesses and everyday Nigerians. For businesses, the cost of importing goods and raw materials has skyrocketed, leading to higher production costs and reduced profit margins. Many companies have been forced to pass these increased costs onto consumers, resulting in higher prices for goods and services. Small and medium-sized enterprises (SMEs), which form the backbone of Nigeria's economy, have been particularly hard-hit, with some struggling to stay afloat amidst rising operational expenses.

For most Nigerians, the devaluation has eroded purchasing power, making it increasingly difficult to afford basic necessities. The rising cost of living has placed additional strain on households, many of which were already grappling with the economic fallout from the removal of fuel subsidies. Inflation has surged, further exacerbating the financial burden on families. The combination of higher fuel prices and a weaker naira has created a perfect storm, leaving many Nigerians feeling the pinch.

The devaluation has also impacted foreign investment. While a weaker currency can make a country's exports more competitive, Nigeria's reliance on imports for many essential goods has offset potential benefits. Investors have grown wary of the economic instability, leading to reduced foreign direct investment (FDI) and capital flight. This has further strained the country's foreign exchange reserves, creating a vicious cycle of depreciation and economic uncertainty.

The government has implemented measures to stabilise the currency and attract investment in response to these challenges. These include tightening monetary policy, increasing interest rates, and seeking external financing. However, these efforts have yet to yield significant results, and the naira remains under pressure. The Central Bank of Nigeria faces the daunting task of restoring confidence in the currency while managing inflation and supporting economic growth.

The interplay between the removal of fuel subsidies and the devaluation of the naira underscores the complexity of Nigeria's economic landscape. While the subsidy removal was necessary for long-term economic stability, its short-term impact, compounded by currency devaluation, has created significant hardship for businesses and individuals alike.

Meanwhile, the Dangote Refinery has emerged as a pivotal player in Nigeria's energy sector. Its completion has alleviated petrol supply challenges, reduced pressure on the government's foreign exchange reserves, and introduced competition into the market. A price war between Dangote and the NNPC Limited has already begun, benefiting consumers in the short to medium term. However, there is a risk that if NNPC cannot compete effectively, Dangote could monopolise the market, harming consumers and the broader economy. While the government's initial resistance to the refinery project has waned, it must remain vigilant to ensure a competitive and fair market.

Beyond its immediate impact, the Dangote Refinery has the potential to position Nigeria as a refining and petrochemical hub in West Africa, attracting further investment and creating jobs. However, realising this potential requires addressing infrastructure deficits and maintaining a stable policy environment. Without these, the refinery's long-term benefits may remain unrealised.

Oil theft has long plagued Nigeria's energy sector, undermining production and depriving the government of crucial revenue. The current administration has adopted a non-kinetic approach, negotiating with groups involved in oil theft and even awarding pipeline protection contracts to some. While this strategy has stabilised production, it is not a long-term solution. Nigeria's ageing infrastructure, frequent pipeline leaks, and vandalism continue to disrupt operations. Additionally, global oil market uncertainties, including OPEC+ debates and geopolitical shifts, could impact Nigeria's ability to capitalise on increased production. Addressing the root causes of oil theft, such as poverty and unemployment in the Niger Delta, alongside modernising infrastructure and enhancing security, is essential for sustainable progress.

Nigeria's economy is often criticised for its over-reliance on oil, but the real issue lies in revenue diversification. While the country boasts diverse economic activities, government revenue remains heavily dependent on oil exports, making it vulnerable to global oil price fluctuations. The government is debating a new tax reform bill to broaden the tax base and increase non-oil revenue. However, the bill faces political opposition, highlighting the sensitivity of tax reforms.

Building public trust in the government is crucial for enforcing tax compliance, a task made more challenging by the current administration's weak electoral mandate. Revenue diversification is not merely about increasing taxes but creating a more resilient economy capable of withstanding external shocks. Achieving this will require political will, transparency, and improved tax collection efficiency.

As Nigeria enters another election cycle, political risks loom large. The temptation for politicians to reverse hard-won economic reforms in pursuit of electoral gains poses a significant threat. Populist policies, such as reintroducing fuel subsidies, could destabilise the economy and deter investment. The current political climate is marked by shifting rhetoric as politicians position themselves for the upcoming elections. This could increase uncertainty and instability, particularly if the government succumbs to pressure to abandon necessary but unpopular reforms.

Global geopolitical dynamics will also be crucial in shaping Nigeria's economic trajectory. European nations are reevaluating their relationships with African countries, adopting a more nuanced diplomatic approach. This shift could impact Nigeria's trade and investment ties with Europe, particularly in the energy sector. Meanwhile, changes in U.S. energy policy and global oil dynamics will directly affect Nigeria's economy. To remain competitive, Nigeria must adapt to these evolving realities by investing in relationships with key global blocs, such as BRICS, Gulf states, and even a potentially recalcitrant EU or hostile U.S. Modernising infrastructure and securing the means to do so will be critical.

Nigeria's energy sector and economic landscape will present both challenges and opportunities over the remainder of the year. The removal of fuel subsidies, the operationalisation of the Dangote Refinery, and innovative approaches to combating oil theft represent significant strides forward. However, these gains are fragile and could be undone by political pressures, infrastructure deficits, and external shocks.

Nigeria must prioritise sustainable reforms, revenue diversification, and investment in critical infrastructure to navigate these challenges. Maintaining a stable policy environment and fostering public trust will be essential for long-term economic stability. At the same time, the country must adapt to global geopolitical shifts and position itself as a competitive player in the evolving energy market.

The road ahead is fraught with obstacles, but with the right strategies and leadership, Nigeria can emerge stronger and more resilient. The choices made today will determine whether the country seizes the opportunities before it or succumbs to the challenges that threaten to hold it back.

Cheta Nwanze is Lead Partner at SBM Intelligence.