ISRAELI-IRAN WAR: RISKS AND UPSIDES FOR THE NIGERIAN ECONOMY
The outbreak of war between Israel and Iran has added a troubling dimension to the challenges of an already floundering global economy. Economies around the world are currently grappling with elevated geopolitical tension triggered by the Russian Ukrainewar and the Israel-Hamas conflict. There is also the profound uncertainty created by the unprecedented tariff disruptions by the trump administration.
For the Nigerian economy, the implications are mixed. The development portends a combination of risks andupsides for the economy.
RISKS TO THE ECONOMY
Energy Cost Escalation
A major driver of energy prices in Nigeria is the global crude oil price. With the outbreak of the Israeli-Iranianwar, crude oil prices had surged to $75 per barrel from $65 per barrel a week before. This is a 15% jump within days. This has obvious implications for petroleum product prices globally. Economies around the world [Nigeria inclusive] would witness a surge in the price of petrol, diesel, jet fuel, gas and related products in the near term. This would have far reaching implications for many economies and businesses.
Implications For Inflation
Energy cost is a major factor in the Nigerian inflation equation. It impacts production cost, logistics cost, transportation costs, and the cost of power generation. This presents an inflationary scenario. These additional costs would be passed on to final consumers, depending on the degree of consumer resistance.
There is also a global inflation dimension. Energy prices have global inflationary implication. Therefore,there is also an expectation of imported inflation in the unfolding geopolitical scenario.
Interest Rate Implication
High inflation drives interest rates as monetary authorities respond to the inflation outcomes of current geopolitical headwinds. A tighter monetary policy regime is expected in Nigeria and other monetary jurisdictions. The expectation is that economies around the world may experience renewed pressures on interest rate. Higher global interests could adversely impact portfolio flows with implications for foreign reserves.
Profit Margins
High energy cost, elevated inflationary pressures and a spike in interest rates are all headwinds that could undermine the profitability of businesses in the economy. Investors in the non-oil sector are likely to be more vulnerable in the present situation.
Nigerian firms with strong business links in the Middle East and those with strong supply chain linkages in the region would be vulnerable at this time because of the current instability in the region.
Risk Of Money Supply Growth
There is a risk of high monetary growth with an increase in revenue from the oil sector. Money supply increases in the Nigerian economy as oil revenue increases because of the monetization of oil receipts. This could pose additional inflation risk and exchange rate depreciation risk. This may provoke a tighter monetary policy stance, which could result in difficult credit conditions for businesses in the economy.
Implications For Global Growth Outlook.
The already floundering global economy would be adversely impacted by this new geopolitical crisis. Global stock markets are reflecting this ominous outlook – the Dow Jones, S & P, and Nasdaq are trending downwards. There is a flight by investors towards ‘safe haven assets’ as global uncertainty heightens. However, in Nigeria, there is historically a positive correlation between crude oil prices, GDP growth, and stock market performance. The outlook for the Nigerian stock market is therefore likely to be positive in the current context.
UPSIDES FOR THE NIGERIA ECONOMY
If the current conflict persists and escalates, the Nigerian economy may record upsides in a number of areas:
Forex Inflows
The surge in crude oil price would impact on foreign exchange earnings, oil being the biggest forex earner for the country. This would even be more impactful if output performance improves. Crude oil price has surged to $75 per which is about 15% higher than before the outbreak of the Israeli–Iran conflict. This development would also positively impact the country’s foreign reserves, ensure better forex liquidity and ultimately the stability of the naira exchange rate.
Revenue Effect.
The oil sector currently accounts for about 50% of government revenue. An improvement in crude oil price would therefore have a significant impact on government revenue. An improvement in revenuewould positively impact fiscal consolidation and hopefully moderate the growth of the fiscal deficit.
Oil And Gas Investment Effect
Investments in the oil and gas sector would post better returns if the conflict persists. High oil price is good news for upstream oil and gas investors.
Dr Muda Yusuf
Director/Chief Executive Officer
Centre for the Promotion of Private Enterprise [CPPE]
15th June 2025
