Why the Naira Keeps Falling: Oil, the Fuel Subsidy and the Devaluation Cycle

Nigeria's currency has shed more than 70% of its value against the dollar since 2020. The naira that traded at roughly ₦360 per dollar in January of that year was exchanging hands at ₦1,580 per dollar on the CBN's official window by May 2026, while parallel-market rates at Lagos bureau de change counters hovered between ₦1,610 and ₦1,640. For ordinary Nigerians watching the purchasing power of their wages erode in real time, the devaluation can feel arbitrary — a punishment with no clear author.

It is not arbitrary. The naira's decline is the product of a structural trap that has been building for six decades: an economy that earns its foreign exchange almost entirely from crude oil, spends a disproportionate share of those earnings subsidising fuel for domestic consumption, and then watches both sources of dollar income and dollar savings collapse simultaneously when oil prices fall or production falters. Understanding that trap is the first step to understanding the exchange rate.

Why Does Nigeria's Currency Depend So Heavily on Oil?

Nigeria is Africa's largest crude oil producer by volume. According to data published by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), the country produced an average of 1.49 million barrels per day in the first quarter of 2026, still well below the 2.0 million barrel-per-day ceiling set under the OPEC+ agreement. Crude oil and gas exports account for roughly 88% of Nigeria's total merchandise export earnings, according to NBS trade figures for 2025. That number has barely moved in 30 years.

The consequence is brutal arithmetic. When Nigeria exports oil, it earns dollars. Those dollars flow into the CBN's foreign reserves, which the central bank then uses to defend the naira in the foreign exchange market and to fund essential imports: refined petroleum products, pharmaceuticals, industrial machinery. As of 31 May 2026, the CBN reported gross external reserves of $37.4 billion — a figure that sounds substantial until you consider that Nigeria imports refined fuel at a cost that NBS estimates at $4.5 billion to $5.5 billion per year in a scenario without domestic refining capacity.

The vulnerability is simple: when global oil prices drop, Nigerian dollar earnings drop. When oil production falls — due to pipeline vandalism in the Niger Delta, subsea equipment failures, or the chronic under-investment that followed years of regulatory uncertainty before the Petroleum Industry Act of 2021 — earnings drop again. The CBN is then left defending the naira with a reserve base that is shrinking, forcing the central bank to choose between allowing the exchange rate to weaken or rationing access to dollars. It has historically attempted both, often at the same time, creating a multiple-rate regime that generates arbitrage and rewards currency speculators over productive importers.

What Role Did the Fuel Subsidy Play in Hollowing Out Nigeria's Finances?

The fuel subsidy is perhaps the single most consequential fiscal policy decision in Nigeria's post-independence history. For decades, the Federal Government maintained domestic petrol prices far below international market levels by paying the difference between the landing cost of imported refined petroleum and the pump price charged to Nigerian consumers. The Petroleum Products Pricing Regulatory Agency (PPPRA) administered the scheme, and the Nigerian National Petroleum Corporation (now NNPC Limited) served as the primary importer and subsidy claimant.

At its peak, the subsidy bill consumed a staggering share of federal revenues. The FIRS and NNPC's own disclosures indicate that subsidy payments exceeded ₦4 trillion in 2022 and were on course to surpass ₦6.7 trillion in 2023 before the scheme was formally ended by President Bola Tinubu on 29 May 2023 — his first day in office — when he declared that "subsidy is gone" in his inauguration address.

The mechanics of how the subsidy drained foreign exchange are less discussed but equally important. Because Nigeria refines almost no crude at home — the Port Harcourt, Warri, and Kaduna refineries operated at or near zero capacity for most of the 2010s and early 2020s — NNPC was importing refined petrol and diesel in dollars. The subsidy was effectively a dollarised expenditure. Every litre of subsidised fuel was a dollar leaving the system. According to CBN data compiled by Nairametrics, Nigeria spent an estimated $10 billion in foreign exchange on petroleum product imports in 2022, a figure that dwarfed the country's total capital expenditure in the same year.

The subsidy also distorted the investment landscape for the entire downstream sector. Private refiners could not compete with subsidised imports, so no private refinery was built. The Dangote Refinery — a 650,000 barrel-per-day facility in Lekki that began phased operations in late 2023 and ramped up through 2024 and into 2025 — is a direct consequence of the subsidy's removal. Without the subsidy distortion, the economics of domestic refining finally made sense.

The Devaluation Cycle: How Oil Shocks Become Currency Crises

Nigeria's exchange rate history since the 1980s reads as a series of oil-triggered devaluation events, each one more severe than the last. The 1986 Structural Adjustment Programme under General Babangida introduced the Second-Tier Foreign Exchange Market and devalued the naira sharply after the 1985 oil price collapse. The 1990s saw the parallel market premium explode under the fixed-rate regime of General Abacha. The 2008-2009 global financial crisis triggered another round of reserve drawdowns and a managed devaluation. The 2014-2016 oil price crash — when Brent crude fell from $115 per barrel to below $28 — produced the most severe dislocation to that point, with the CBN spending $15 billion in reserves trying to hold ₦197 per dollar before eventually adjusting to ₦305 in 2016.

The 2020-2023 cycle was different in scale but not in structure. COVID-19 collapsed oil demand and prices simultaneously. Nigeria's production was already declining due to theft and sabotage. The CBN maintained multiple exchange rate windows — official, investors and exporters (I&E), bureau de change, and interbank — creating a gap that widened to ₦250 per dollar at its extreme in early 2023. The apex bank spent down reserves from a peak of $42.6 billion in 2019 to $33.8 billion by mid-2022 in a futile attempt to maintain the fiction of an overvalued official rate.

The June 2023 unification of exchange rate windows was, by any technical measure, the correct response to a decade of suppressed adjustment. The CBN collapsed the multiple windows into a single market-reflective rate and allowed the naira to find its level. It found a painful one: the currency moved from ₦461 to ₦770 per dollar within weeks, and has continued to depreciate as the structural imbalances — low oil production, low non-oil exports, high import dependency — persist beneath the surface.

Has Removing the Fuel Subsidy Helped the Naira?

The short answer is: partially, and not yet in the way that was promised. The removal of the fuel subsidy has materially improved the Federal Government's fiscal position. The budget office reports that the savings redirected from subsidy payments allowed for a partial increase in the federal capital allocation in 2024, and NNPC Limited's monthly remittances to the Federation Account have become more consistent. The NGX All-Share Index reached a record high in early 2024, in part because investors priced in the improved fiscal trajectory.

However, the naira did not stabilise after subsidy removal. Several dynamics explain this. First, the removal of the subsidy increased the naira cost of fuel sharply — pump prices in Lagos moved from ₦185 per litre before May 2023 to above ₦1,200 per litre by mid-2025 — feeding into transport costs, food prices, and general inflation. The NBS headline inflation rate peaked at 34.8% in December 2024 before easing to 31.7% by April 2026, according to the most recent NBS Consumer Price Index release. High inflation erodes confidence in the naira and increases dollar demand as a store of value.

Second, the CBN's foreign reserve position remains insufficient to absorb sharp swings in oil earnings. NUPRC data shows that Nigeria's actual crude production in 2025 averaged 1.52 million barrels per day — above recent lows but still 25% below peak capacity. At $70 per barrel, the country earns approximately $39 billion annually in crude export revenues before costs, royalties, and the share attributable to international oil company partners. That leaves a thin margin for reserve building after debt service, which the Debt Management Office (DMO) puts at $4.66 billion in external debt service for 2026.

Third, structural demand for dollars from Nigerian businesses, students abroad, diaspora remittance corridors, and healthcare tourism remains robust. The CBN's weekly FX sales data shows demand routinely exceeding supply at the official window, which keeps pressure on the parallel market rate. The gap between official and black market rates — which the CBN's 2023 unification was meant to close permanently — had reopened to approximately ₦60-80 per dollar by the first quarter of 2026.

For a fuller picture of how the official and parallel markets interact today, see our complete guide to the dollar-to-naira rate.

What Would Stabilise the Naira?

Three structural conditions, if achieved simultaneously, would materially alter the naira's trajectory. First, sustained crude oil production above 1.8 million barrels per day — the level the NUPRC has set as its medium-term target — would increase dollar inflows by an estimated $7-9 billion per year at current prices. The rehabilitation of NNPC's pipeline infrastructure and progress on the Ajaokuta-Kaduna-Kano gas pipeline corridor are preconditions for this.

Second, Dangote Refinery reaching its full nameplate capacity of 650,000 barrels per day and servicing Nigerian domestic demand would eliminate the country's largest single source of dollar import demand. As of the first half of 2026, the refinery was reportedly processing approximately 300,000-400,000 barrels per day and had begun exporting refined products, generating foreign exchange rather than consuming it — a structural reversal of the subsidy-era dynamic.

Third, non-oil export development. Nigeria's non-oil exports — agricultural commodities, solid minerals, creative and digital services — remain below 12% of total export earnings. The Federal Government's Renewed Hope Agenda has set targets for increasing cocoa, sesame, and cashew exports, but progress against those targets in verifiable NBS data remains modest.

The naira's trajectory will be determined by how quickly those three conditions materialise relative to the pace of dollar demand growth from a population that the NBS estimates at 223 million and growing at 2.4% per annum.

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Regulatory note: This article is produced for editorial and informational purposes by The Cowrie, an independent Nigerian financial media publication. The Cowrie holds no financial services licence issued by the Central Bank of Nigeria (CBN), the Securities and Exchange Commission (SEC Nigeria), or the Federal Inland Revenue Service (FIRS), and nothing in this article constitutes financial or investment advice. CBN Circular FEF/DIR/CIR/GEN/08/009 governs the conduct of foreign exchange transactions in Nigeria; readers are advised to consult a licensed financial institution for any currency-related services.