Nigeria’s naira has exhibited a remarkable decoupling from Brent crude oil prices in the first half of 2025, trading near ₦1,530–1,556 per US dollar despite a 15 per cent drop in oil benchmarks. This stability contrasts starkly with the 41 per cent depreciation witnessed in 2024.
Our investigation highlights three key drivers behind this phenomenon: the naira’s undervaluation creating carry‑trade inflows; a surge in non‑oil exports to ₦3.168 trillion in Q1; and a contraction in import demand following policy shifts.
These developments have coincided with a weakening US dollar and record returns in local bonds (19 per cent) and equities (18 per cent) — the best performances since 2020. However, beneath the surface, structural vulnerabilities persist.
President Tinubu’s FX liberalisation and subsidy reforms have set the stage, but long‑term resilience will depend on accelerating local refinery output, cementing fiscal discipline, and sustaining export diversification.
Historical Context and the 2024 Meltdown
Naira–Oil Correlation Pre‑2025
For the past decade, Nigeria’s currency closely tracked crude prices: every $1 move in Brent corresponded to approximately ₦2.50 in the naira’s value. The central bank’s multiple peg adjustments and FX restrictions dampened volatility temporarily but at the cost of black‑market spreads and reserve depletion.
Policy Shock and Rapid Depreciation
In January 2024, the Central Bank of Nigeria (CBN) scrapped its long‑standing multiple‑window regime, allowing the naira to float freely. Initial optimism evaporated as the currency plunged from ₦1,160 to ₦1,640 by December — a 41 per cent loss, driven by dwindling FX reserves, persistent fuel importation, and a surging dollar index.
Key Impact:
- Inflation Spike: Consumer Price Index peaked above 21 per cent.
- Trade Pressures: Rising import bills for refined petrol and manufactured goods.
- Investor Flight: Sovereign risk premia widened to record levels, with 10‑year yields breaching 18 per cent.
The 2025 Turnaround: Indicators of a New Equilibrium
Oil Price Trajectory
Brent crude began 2025 near $80/barrel, sliding to $68/barrel by June — a 15 per cent downturn. Yet the naira’s average exchange rate remained anchored at ₦1,556 in H1, touching ₦1,530 by June.
Chart 1: Exchange Rate vs Brent Price
(Refer to the downloadable line chart “Naira vs Brent Price H1 2025”) which visualises the disconnect between FX and oil movements.)
PPP Valuation Gap
Purchasing Power Parity models place fair value at ₦1,200/$1, implying a 23 per cent undervaluation. This gap has invited short‑term arbitrage and carry‑trade strategies, bolstering naira demand in offshore markets.
Carry‑Trade and Capital Flows
Mechanism Explained
Investors borrow naira at domestic rates (15–16 per cent) and convert to dollars to invest in higher‑yield assets abroad or in Nigerian dollar‑denominated bonds (yields ~14 per cent). Profit margins arise from interest differentials and expected naira appreciation.
Volume Estimates
According to EMIM London, net offshore portfolio inflows into Nigerian debt totalled US\$1.2 billion in H1 2025, compared to outflows of US\$0.4 billion in H1 2024.
Risks of Reversal
Should global risk sentiment sour, these flows could unwind rapidly, exerting downward pressure on the naira. The IMF has cautioned about overreliance on short‑term capital to stabilise currencies in frontier markets.
Non‑Oil Export Surge
Q1 2025 Data Breakdown
Nigeria posted non‑oil export revenues of ₦3.167 trillion in Q1 2025, up from ₦2.478 trillion in Q1 2024—representing a 27.8 per cent year‑on‑year increase. Agricultural products (cocoa, sesame, cashews) accounted for ₦1.12 trillion, while solid minerals (limestone, gold, barite) contributed ₦0.85 trillion.
Manufactured goods (textiles, processed foods, cement) comprised the balance at ₦1.197 trillion.
Comparative Historical Context
This marks the highest quarterly non‑oil export record since Q4 2019 (₦3.45 trillion), when global demand briefly surged post‑pandemic. Policy catalysts include:
Export Incentive Scheme (EIS): Duty drawbacks and tax rebates for exporters, introduced May 2024.
Forex Repatriation Mandate: 90‑day repatriation window for export proceeds, implemented January 2025.
Port Modernisation: Lagos and Tin Can Island terminals achieved 25 per cent faster turnaround times.
Impact on FX Stability: Increased foreign currency inflows from non‑oil exports have directly reduced pressure on the naira by supplementing oil revenues with more stable hard‑currency streams.
Import Demand Trends
Q1 2025 Import Data
Total imports fell to ₦15.43 trillion in Q1 2025 from ₦16.17 trillion in Q4 2024—a 4.59 per cent quarter‑on‑quarter drop. Key categories driving the contraction were:
Refined Petroleum Products: Down 22 per cent as NNPC’s rehabilitation of the Warri refinery increased local output by 75,000 bpd.
Machinery & Electronics: Declined 8 per cent amid higher borrowing costs and tighter import licensing.
Foodstuffs & Beverages: Reduced by 5 per cent following import substitution policies for rice and poultry.
Policy Interventions
The CBN’s ‘Local Refining First’ directive mandated oil majors to off‑take a minimum 30 per cent of refined product domestically, spurring private‑sector investment in modular refineries. Simultaneously, the Federal Government imposed new forex fees on non‑essential imports to discourage frivolous FX usage.
Consequence for Reserves: Lower import bills helped stabilise gross external reserves, which rose from US\$37.8 billion in December 2024 to US\$39.2 billion by June 2025.
Portfolio Performance Analysis
Local Bond Market
Performance: A Bloomberg index for Nigerian local bonds returned 19 per cent in H1 2025—the strongest half‑year showing since December 2020. Yields on the 10‑year FG bond fell from 16.1 per cent in January to 13.4 per cent in June.
Drivers: Improved fiscal revenue projections, stable naira outlook, and credit rating affirmations by S\&P and Fitch.
Equity Market
All‑Share Index: Up 18 per cent YTD, driven by banking (+22 per cent) and consumer staples (+19 per cent) sectors.
Market Capitalisation: Rose from ₦51 trillion in December 2024 to ₦60.2 trillion in June 2025.
Foreign Participation: Net portfolio equity inflows of US\$450 million in H1 2025 vs. outflows of US\$200 million in H1 2024.
Comparative Emerging‑Market Context
While Nigeria’s bond returns outperformed the JPMorgan Emerging Markets Local Currency Index (12 per cent H1 2025), equity gains lagged slightly behind MSCI EM (+20 per cent).
Currency Correlation Shift
According to Standard Chartered’s Samir Gadio, the naira’s correlation with global risk appetite rose to 0.78 in H1 2025 from 0.52 in H1 2024—underscoring its transition from an oil‑proxy to a risk‑sensitive asset.
Political Economy and Policy Impact
Tinubu’s Reform Agenda
Upon taking office in May 2023, President Bola Ahmed Tinubu embarked on a landmark structural adjustment programme. Key measures included:
FX Liberalisation: Merging multiple FX windows into a unified, floating exchange rate, enhancing price discovery.
Fuel Subsidy Removal: Phased elimination of petrol and diesel subsidies, freeing ₦2.5 trillion for infrastructure and social spending.
IMF Engagement: Secured a US\$3 billion Stand‑By Arrangement in March 2025, conditional on fiscal consolidation and governance reforms.
These moves signalled commitment to market‑friendly policies, attracting cautious investor interest. Yet subsidy removal pushed inflation to 19.2 per cent in May, eroding purchasing power for lower‑income Nigerians.
Fiscal Discipline and Debt Dynamics
Nigeria’s debt‑to‑GDP ratio rose to 45.8 per cent by Q1 2025, driven by past deficit financing and FX‑indexed loans. Tinubu’s administration introduced:
Budget Deficit Target: Capping the 2025 deficit at 4.5 per cent of GDP, down from 6.1 per cent in 2024.
Revenue Mobilisation: Strengthened VAT administration and expanded tax net to informal sectors.
Expenditure Reprioritisation: Cutting non‑essential recurrent spending by 10 per cent.
Credit agencies have maintained Nigeria’s ‘B+’ ratings but warned that execution risks remain elevated.
Risks & Countervailing Forces
Commodity Price Shocks
Should oil prices rebound above US\$80/bbl, FX inflows would improve—but a subsequent downturn could again shock the naira without sufficient reserves and policy buffers.
Inflation and Social Strain
High inflation risks social discontent and strains on household budgets; real wages have fallen by 7.4 per cent year‑on‑year. Further subsidy cuts or VAT hikes could provoke protests.
Political Headwinds
Opposition parties and labour unions oppose aggressive economic measures. Election‑year pressures in late 2025 could lead to policy reversals or populist spending.
External Shocks
Global risk-off events—such as US rate hikes or geopolitical crises—could reverse portfolio flows, as witnessed during COVID‑19 and Russia‑Ukraine tensions.
Conclusions
Nigeria’s naira has defied an oil downturn through undervaluation arbitrage, export diversification, import substitution, and policy reforms.
However, the sustainability of this decoupling is contingent upon:
Deepening Refining Capacity: Accelerating local refinery projects to slash import dependence.
Fiscal Reforms: Upholding deficit targets, broadening the tax base, and institutionalising transparency.
Inflation Management: Balancing monetary tightening with growth objectives to avoid stifling private sector activity.
Absent these, the current stability could prove a mirage, vulnerable to both internal frictions and external shocks.
Strategic Recommendations
For Policymakers: Fast‑track legislation to support modular refineries and formalise export‑led growth incentives.
For Investors: Capitalise on high‑yield bond and equity opportunities but hedge against potential FX volatility via collar strategies.
For Businesses: Leverage government incentives to diversify supply chains and focus on non‑oil export markets.
