In finance, there’s a widely understood principle: the aim of any analysis is to uncover a profitable opportunity. For a young Nigerian reflecting on the last decade and looking ahead to the future, a pressing question emerges: what is the path to a profitable future? This inquiry is crucial as the current realities in Nigeria cast a shadow over the prospects of the average Nigerian youth. The most glaring issue is the erosion of the Naira’s purchasing power.
Once, stories of young Nigerians receiving brand-new cars from the government were the stuff of legend, proudly shared by their parents. Today, these same young people struggle to afford secondhand cars, often decades old. In fact, it has become common for Nigerians to buy damaged cars abroad, import them, and restore them for local use.
This paints a picture of a generation that, despite having “good” jobs, has little in the way of tangible assets.
Exacerbating the situation, with interest rates soaring above 20%, borrowing can swiftly become a financial burden—like a millstone dragging one down. Yet, even in times of instability, there are opportunities. In both equities and fixed income, today’s economic chaos may offer rare, once-in-a-lifetime investment prospects. While some argue that only those who have met their basic needs can afford to invest, the truth is clear: those who thrive in such times must act with boldness and foresight.
The realities in Nigeria are stark. As of this writing, the price of Premium Motor Spirit (PMS), commonly known as fuel, ranges from N855 to N950. Meanwhile, the naira is trading between N1,600 and N1,700 per U.S. dollar. These two variables—fuel prices and the exchange rate—are critical indicators of the Nigerian economy and significantly impact the daily lives of Nigerians, often in ways that are overlooked. This article aims to simplify these economic complexities and provide readers with a clearer understanding of how we got here, and more importantly, what needs to be done to change course.
Over the last year, fuel prices and the exchange rate have dominated economic discussions, and for good reason—they are integral to everyday life in Nigeria. Nigeria holds the unfortunate distinction of being the only OPEC member that imports petroleum products, making it the largest importer of PMS despite being a crude oil exporter. The government introduced a fuel subsidy to ease the burden of living costs, but what was intended as a temporary relief ballooned into a major fiscal burden. By early 2024, the subsidy bill had reached N2.62 trillion—nearly a third of Nigeria’s budget deficit.
Beyond inefficiencies, the subsidized fuel was also smuggled across borders for profit, further complicating the issue. While the removal of the subsidy was necessary, the immediate result has been a significant increase in fuel prices, leaving the average Nigerian struggling to cope. This problem is exacerbated by Nigeria’s status as a mono-economy, heavily reliant on crude oil exports while importing refined petroleum products.
Thankfully, with the Dangote Refinery now operational, there is hope for locally refined crude to reduce dependence on imports. However, the benefits will take time to materialize. By December, we may see some relief in the form of stable fuel supplies, but structural issues remain.
The government, in theory, should reinvest the savings from subsidy removal into infrastructure and development projects to ease the economic burden on citizens. However, given Nigeria’s low ranking of 145 out of 180 countries on the Corruption Perception Index, many are skeptical that these funds will be effectively utilized. Without transparency, the financial relief intended for the public could be siphoned off by corrupt officials. At the very least, the funds should be directed into sectors capable of generating foreign exchange revenue. Nigeria’s export composition is dominated by mineral products, which make up around 90% of total exports. This leaves the country vulnerable to commodity price fluctuations, which can easily trigger economic crises.
The exchange rate is equally problematic. Nigeria has recently adopted a “willing buyer, willing seller” model, which in theory allows buyers and sellers to negotiate the rate. However, the imbalance of power—where sellers, particularly state actors with access to foreign currency, dictate terms—has resulted in further depreciation of the naira.
Under former Central Bank Governor Godwin Emefiele, the naira was artificially pegged at N460 per U.S. dollar, supported by exaggerated foreign reserve figures. Once it was revealed that Nigeria’s unencumbered reserves might be as low as $3.7 billion—less than half of McDonald’s net income for 2023—the market reacted severely, and the naira quickly plummeted to its current level. This devaluation is disastrous for an import-dependent country, especially for the middle class, as prices of goods and services skyrocket without corresponding wage increases.
The relationship between PMS prices and the exchange rate is clear. Fuel costs are driven by two main factors: global crude oil prices and the exchange rate. While crude oil prices are inherently volatile, the naira’s depreciation has been more destabilizing, leading to a steady rise in fuel prices. With an understanding of crude oil prices and the prevailing exchange rate, one can reasonably estimate the expected pump price. Any significant deviation from these estimates signals inefficiency or mismanagement within the system.
As Nigerians face increasing hardship, there is one overlooked reality: the devaluation of the naira has also boosted crude oil revenue in naira terms, significantly increasing allocations to government officials at all levels. This raises a critical question: what is the trade in all of this?
The current economic difficulties could be a turning point for Nigeria, but only if we address the missing link- accountability. While much of the blame is directed toward the federal government, it is essential to recognize the roles that state and local government officials play in managing resources and delivering services. Holding local and state leaders accountable is a more efficient way to demand progress than focusing solely on the federal government.
Fiscal authorities, from the local government chairmen to state governors, have a direct responsibility in ensuring that public funds are used effectively. Until these leaders are held to account, the economic burden will continue to fall on ordinary Nigerians, and the potential for meaningful change will remain unrealized.
