Higher state spending, rising personnel costs and election-related expenditure expected to outweigh gains from increased revenue…..
The World Bank has projected that Nigeria’s consolidated fiscal deficit will increase from 3.1 per cent of gross domestic product (GDP) in 2025 to 3.5 per cent in 2026, as rising government expenditure threatens to offset gains from higher revenues.
In its latest Nigeria Development Update (NDU), titled Beyond the Federal Purse: How Higher Revenues Reshaped State Priorities, the bank said increased capital spending by states, alongside higher federal personnel and interest costs and pre-election expenditure, would widen the deficit.
“Despite the narrower federal fiscal deficit in H1 2026, stronger capital spending by states alongside rising federal personnel, interest, and pre-election spending is expected to widen the consolidated fiscal deficit from 3.1 percent of GDP in 2025 to 3.5 percent in 2026, outweighing stronger revenues,” the World Bank said.
The consolidated fiscal deficit measures the difference between total government revenue and expenditure across the federal, state and local levels.
According to the report, rising oil prices following the outbreak of conflict in the Middle East have boosted government revenue and strengthened Nigeria’s external position. However, existing oil sales arrangements and financing commitments have limited the benefits to public finances.
At the federal level, the deficit narrowed from five per cent of GDP in the first half of 2025 to four per cent in the corresponding period of 2026.
The bank attributed the improvement to increased revenue allocations from the federation account, stronger independent revenue collections by the Federal Government and slower reported capital budget execution.
Despite the improvement, the World Bank warned that increased spending in the second half of the year could reverse some of the gains recorded.
It added that while public debt remains moderate and is expected to decline gradually, the high cost of servicing existing obligations continues to restrict the government’s fiscal flexibility.
Nigeria’s economy, however, maintained steady growth, with real GDP expanding by 4.2 per cent in the first half of 2026, slightly above the average growth rate of four per cent recorded in 2024 and 2025.
“High-frequency indicators point to sustained expansion through Q3 2026, despite continued pressures from higher fuel costs,” the bank said.
It added that achieving stronger, sustainable and inclusive growth would depend on maintaining macroeconomic stability and advancing structural reforms to boost productivity and private investment.
The institution also identified infrastructure development, investment in human capital, an improved business environment, stronger competition and reduced insecurity as key priorities for accelerating economic growth.
On inflation, the report said the downward trend had been disrupted by rising oil prices following the Middle East conflict.
“Inflation fell from 27.6 percent year-on-year in January 2025 to 15.2 percent in December, supported by tight monetary policy and reduced exchange-rate volatility,” the report said.
“Since February 2026, however, headline inflation has hovered around 15.5 percent y/y, as higher fuel prices and the lean season pushed prices up.
“Food inflation remained elevated at 19.6 percent in August 2026, compared with 8.9 percent in January.
“The Central Bank of Nigeria cut the monetary policy rate by 350 basis points to 23 percent in September 2026 after keeping policy parameters unchanged for several months.”
The World Bank said the transmission of monetary policy had improved, but structural weaknesses in the implementation framework continued to limit its effectiveness.
It recommended reducing reliance on the high cash reserve ratio, further narrowing the interest rate corridor, separating liquidity management from reserve accumulation objectives and improving transparency in policy implementation.
Nigeria’s external position also strengthened during the first half of 2026, with the current account surplus rising to $12 billion, equivalent to seven per cent of GDP, from $8.6 billion, or 6.7 per cent of GDP, in the same period of 2025.
The bank attributed the increase to higher oil export earnings and lower oil imports.
However, it cautioned that the accumulation of foreign reserves remained dependent on short-term foreign portfolio investments, partly because of limited repatriation of oil export proceeds and low foreign direct investment.
The report said sustaining external stability would require lower inflation, continued exchange-rate flexibility, a deeper foreign exchange market and reforms capable of attracting longer-term investment.
The World Bank projected that Nigeria’s economy would grow by an average of 4.4 per cent between 2026 and 2028, while inflation is expected to moderate to about 12 per cent by 2028.
Despite the growth outlook, the institution warned that poverty remained high and said faster poverty reduction would depend on lower inflation, more productive employment, improved access to electricity and essential public services, and more effective social protection programmes.
It identified global economic volatility, election-related spending, a prolonged conflict in the Middle East and insecurity as major risks to Nigeria’s economic outlook.
The bank also warned that drought, extreme heat and flooding could undermine agricultural output, push up food prices and worsen the livelihoods of vulnerable households.
