Middle East conflict to boost Nigeria’s FX earnings, foreign reserves, but petrol price seen rising

THE Centre for the Promotion of Private Enterprise (CPPE) has warned that the escalating conflict involving Iran, the United States and Israel could have far-reaching implications for Nigeria’s economy, with potential short-term gains from higher oil prices offset by inflationary pressures and capital flow risks.

In a policy brief released on March 1, 2026, CPPE’s Chief Executive Officer, Dr Muda Yusuf, said the renewed geopolitical tensions have injected significant uncertainty into global markets, particularly energy markets. Of strategic concern is the Strait of Hormuz, a critical shipping corridor through which about 20 percent of global crude oil supply passes daily. Any disruption to this route, he noted, could trigger spikes in oil prices, higher shipping and insurance costs, and broader supply chain disruptions.

For Nigeria, where crude oil accounts for more than 85 percent of export earnings and roughly half of government revenue, the economic implications are substantial.

Oil price gains depend on production levels

CPPE’s CEO explained that geopolitical conflicts in the Middle East typically drive oil prices higher due to fears of supply disruptions. Even speculative concerns around the Strait of Hormuz can push prices up by between $5 and $15 per barrel within a short period.

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Higher crude prices would immediately boost Nigeria’s export earnings, strengthen foreign exchange inflows, raise external reserves and increase allocations from the Federation Account Allocation Committee (FAAC) to federal, state and local governments.

However, Yusuf cautioned that Nigeria’s ability to fully benefit from any oil price surge is constrained by production challenges. Current output, fluctuating between 1.4 million and 1.6 million barrels per day, remains below installed capacity and is hampered by oil theft, pipeline vandalism and underinvestment in upstream infrastructure.

It also warned that if the conflict escalates and slows global economic growth, oil demand could weaken, leading to price corrections and eroding the fiscal gains.

Exchange rate and capital flow pressures

According to Dr Yusuf, higher oil prices could strengthen Nigeria’s current account balance and improve foreign exchange liquidity, easing pressure on the naira and bolstering investor confidence.

Improved oil receipts may enhance external reserves and reduce speculative pressure in the foreign exchange market. However, global geopolitical uncertainty often triggers risk aversion among investors, leading to capital flight from emerging markets to safe-haven assets such as U.S. Treasury securities and gold, he added.

Given Nigeria’s reliance on foreign portfolio investment and its relatively shallow capital market, potential outflows could offset gains from improved oil earnings, resulting in exchange rate volatility.

Inflation risks and welfare concerns

The think tank identified inflation as the most immediate domestic risk. With Nigeria operating a deregulated downstream petroleum regime, higher global crude prices are likely to translate into increased pump prices for petrol, diesel and aviation fuel.

This would raise transportation and logistics costs, push up food distribution expenses and increase production costs for manufacturers. Energy costs have a strong multiplier effect on Nigeria’s inflation dynamics, particularly as transportation and food make up a large share of household spending.

CPPE warned that while government revenues may improve, households could face worsening cost-of-living pressures, potentially deepening poverty levels.

“Thus, while government revenues may rise, household welfare could deteriorate—creating a divergence between fiscal gains and social outcomes,” Yusuf noted.

Mixed outlook for capital markets

The Nigerian capital market is expected to experience sector-specific impacts. Oil and gas stocks may benefit from stronger earnings expectations and renewed investor interest in energy assets.

Conversely, companies in manufacturing, aviation, logistics and consumer goods could face margin pressures due to rising energy and input costs. Increased global financial tightening could also dampen foreign portfolio inflows, heightening short-term volatility in equity and fixed-income markets, Yusuf explained.

Call for fiscal discipline and diversification

The CPPE boss urged the government to avoid repeating past cycles of excessive spending during oil price booms. It described the current situation as an opportunity for fiscal consolidation, recommending that part of any oil windfall be saved in stabilisation mechanisms, fiscal deficits reduced, and public debt accumulation moderated.

READ ALSO: World Bank sees Nigeria’s higher oil output offseting lower international oil prices

He also called for prioritising capital expenditure over recurrent spending, strengthening oil production capacity within OPEC limits, accelerating domestic refining to reduce dependence on imported petroleum products, and sustaining foreign exchange market reforms.

Targeted social protection measures were recommended to cushion vulnerable households against inflation shocks, alongside renewed efforts to diversify the economy through non-oil exports, manufacturing, agro-processing, ICT and services.

In conclusion, CPPE described the conflict as a ‘double-edged shock’ for Nigeria — offering short-term fiscal and external balance improvements through higher oil prices, but posing significant risks through inflation, capital flow volatility and global growth moderation.

“The ultimate impact will depend less on external developments and more on domestic policy discipline,” Yusuf noted. “Strategic savings, improved production efficiency, macroeconomic prudence and structural diversification will determine whether Nigeria turns geopolitical turbulence into economic resilience.”