Nigeria's External Sector Faces Perfect Storm

Nigeria's external financial position deteriorated sharply in 2025, with the Balance of Payments surplus collapsing 38% to $4.23 billion—a warning signal for European investors betting on naira stability and oil-dependent growth narratives.

The decline mirrors a cascade of sectoral weaknesses that expose the fragility of Africa's largest economy. Crude oil exports, traditionally Nigeria's foreign exchange lifeline, contracted 14.41% to $31.54 billion, reflecting both lower production volumes and softer global commodity pricing. Simultaneously, foreign portfolio investment dried up dramatically, plummeting 48.3% to just $8.04 billion—a red flag suggesting international capital confidence is eroding.

The current account surplus, which typically buffers balance sheet shocks, fell 26% year-on-year to $14.04 billion from $19.03 billion in 2024. This compression matters because it represents the net flow of goods, services, and transfers that fund external obligations. When this cushion shrinks while capital outflows accelerate, currency depreciation pressures intensify.

Yet contradicting this narrative, the naira has staged a surprising appreciation rally in recent weeks, strengthening to N1,345/$ in late March—its best level in one month—while touching N1,403 in parallel markets. This disconnect between macroeconomic fundamentals and currency performance warrants scrutiny. The naira's strength likely reflects Central Bank intervention via Treasury Bill auctions (the CBN raised N3 trillion in two weeks of short-term borrowing) and dollar inflows from oil receipts during peak trading periods. This is not sustainable demand-driven appreciation; it is rate-support mechanics masking underlying pressure.

The structural problem is evident: Nigeria's external revenues are insufficient to cover import demand and service external debt comfortably. With BOP surplus at multi-year lows and commodity export pipelines under stress from aging infrastructure, the Central Bank faces a difficult choice—burn foreign reserves to defend the naira or allow controlled depreciation that imports inflation but preserves reserves.

For European investors, the implications are material. Manufacturing firms importing raw materials face currency headwinds when dollar inflows slow. Portfolio managers exposed to Nigerian equities or naira-denominated bonds should anticipate volatility as the CBN navigates this squeeze. The All-Share Index, though hitting record highs in March at 200,000+ points, reflects domestic liquidity rather than improving corporate fundamentals—a classic bull-trap scenario.

The manufacturing sector's reprieve comes via the government's 5% GDP industrial financing allocation under the new Industrial Policy, signalling intent to reduce import dependency. However, absent crude oil productivity recovery (which requires capex and security improvements in Niger Delta), the external account will remain under pressure.

Inflation, while marginally declining to 15.06% in February from 15.10%, remains elevated. The Lagos Chamber of Commerce warns against complacency—and justly so. Currency depreciation will reverse recent inflation gains, making consumer purchasing power vulnerable and pricing competitiveness for export-oriented firms uncertain.

**Bottom line:** Nigeria's BOP crisis is not acute yet, but its trajectory is troubling. European investors should adopt a wait-and-see posture on new currency-exposed commitments until oil export trends stabilize and the CBN's foreign reserve position clarifies.

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