Escalating tensions among Iran, the United States and Israel could offer short-term relief for Nigeria’s foreign exchange market, even as inflationary pressures threaten household welfare, according to Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise.
In a policy brief titled “Implications of the Iran–U.S.–Israel Conflict on the Nigerian Economy,” Yusuf said the deepening geopolitical crisis has injected fresh uncertainty into the global economy, with oil prices reacting upward amid fears of supply disruptions.
For Nigeria, where crude oil accounts for more than 85 percent of export earnings and roughly half of government revenue, higher oil prices could significantly alter macroeconomic conditions. “Higher oil prices typically strengthen Nigeria’s current account balance and improve foreign exchange liquidity,” Yusuf said. “This could reduce short-term pressure on the naira and reinforce investor confidence.”
He noted that in recent years, exchange rate stability has been closely linked to oil receipts and capital inflows. Improved export earnings, he explained, could boost gross external reserves, enhance liquidity in the foreign exchange market, and reduce speculative pressure on the currency.
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However, Yusuf cautioned that geopolitical crises often trigger global risk aversion. During periods of heightened uncertainty, international capital tends to migrate toward safe-haven assets such as United States Treasury securities and gold. Emerging and frontier markets frequently suffer portfolio outflows during such episodes.
Given Nigeria’s relatively shallow capital market and dependence on foreign portfolio inflows, heightened volatility in global financial conditions could offset part of the gains from stronger oil receipts. “The net exchange rate impact will depend on the balance between stronger oil inflows and potential capital reversals,” he said.
Oil Price Gains Face Production Constraints
Historically, geopolitical tensions in the Middle East generate sharp swings in crude oil prices due to concerns over supply disruptions, particularly around critical transit routes such as the Strait of Hormuz. Even speculative risks have been known to push prices up by between $5 and $15 per barrel within short periods.
For Nigeria, each incremental increase in crude oil prices translates into higher export receipts and fiscal revenues. Immediate gains could include stronger foreign exchange inflows, improved external reserve buffers, and increased allocations from the Federation Account Allocation Committee to federal, state and local governments.
Yet Yusuf stressed that the extent of revenue gains would depend heavily on Nigeria’s production performance. Current output has fluctuated between 1.4 million and 1.6 million barrels per day, below installed capacity and vulnerable to oil theft, pipeline vandalism and persistent underinvestment in upstream infrastructure.
“Without sustained improvements in production efficiency and security, Nigeria may not fully optimise any price windfall,” he warned.
He also flagged medium-term risks. Should the conflict escalate to the point of dampening global economic growth, oil demand could weaken, triggering a correction in prices and eroding fiscal gains. “The fiscal upside is inherently fragile if global growth slows,” Yusuf added.
Inflation Transmission and Welfare Pressures
While higher oil prices could boost government revenues and reserves, the immediate domestic consequences may be less favourable.
Nigeria operates a deregulated downstream petroleum regime, meaning international crude price increases are quickly transmitted to domestic fuel prices. Rising crude prices are therefore likely to translate into higher pump prices for petrol, diesel and aviation fuel.
Yusuf identified multiple transmission channels, including rising transportation and logistics costs, higher food distribution expenses, and escalating input costs for manufacturers. Energy prices have a pronounced multiplier effect in Nigeria’s inflation dynamics, particularly since transportation and food account for a large share of consumer spending.
“With purchasing power already fragile, sustained increases in fuel prices could intensify cost-of-living pressures and deepen poverty levels,” he said.
This creates a policy dilemma: fiscal revenues may strengthen while household welfare deteriorates, widening the gap between macroeconomic gains and social outcomes.
Capital Market Impact
The Nigerian capital market is likely to experience mixed sectoral effects.
Oil and gas companies could benefit from improved earnings expectations and renewed investor interest in energy-linked assets. Higher realised crude prices may support profitability and bolster valuations in the sector.
Read also: Nigeria’s crude eyes $80 as US/ Iran standoff rattles global supply
Conversely, manufacturers, aviation operators, logistics firms and consumer goods companies could see margins squeezed by higher energy and operating costs. Heightened global uncertainty could also weaken foreign portfolio flows into equities and fixed-income instruments.
As global investors recalibrate risk amid geopolitical volatility, Nigeria’s financial markets may face increased short-term swings.
Overall, Yusuf said the ultimate impact of the Iran–U.S.–Israel conflict on the naira and the broader economy will hinge on the duration of the crisis and the strength of domestic policy responses. “The effects will be both positive and adverse,” he noted, “depending on how long the tensions persist and how effectively Nigeria addresses its structural vulnerabilities.”
