…. Country’s Fiscal Deficit Expected To Widen On 2026
… Food Inflation Hits 19.6% As Bank Urges Reforms To Boost Jobs, Investment, Poverty Reduction
Daud Olatunji
Nigeria’s fiscal deficit is projected to widen to 3.5 per cent of Gross Domestic Product in 2026 from 3.1 per cent in 2025, as rising capital expenditure by state governments and anticipated pre-election spending threaten to outweigh gains from increased government revenues, the World Bank has warned.
The bank also cautioned that mounting personnel costs, debt-servicing obligations and other expenditure pressures at the federal level could reverse recent improvements in the country’s fiscal position.
The warning was contained in its latest Nigeria Development Update, titled Beyond the Federal Purse: How Higher Revenues Reshaped State Priorities, which examined the impact of increased government revenues on spending decisions across the country.
According to the report, improved oil earnings and higher allocations to governments have not eliminated the risk of a widening budget deficit, as spending by federal and state authorities continues to put pressure on public finances.
“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 bank said.
The consolidated fiscal deficit measures the gap between total revenue and expenditure across the federal, state and local governments, providing a broader picture of the country’s public finances.
The projection comes despite higher oil prices following the conflict in the Middle East, which the World Bank said had supported government revenues and strengthened Nigeria’s external position.
However, existing oil sales and financing commitments have limited the benefits available to the public purse.
The World Bank reported that Nigeria’s federal fiscal deficit narrowed from five per cent of GDP in the first half of 2025 to four per cent in the corresponding period of 2026.
It attributed the improvement to higher federation revenue distributions, stronger independent revenues generated by the Federal Government and slow reported execution of capital expenditure.
However, the bank warned that the improvement might not be sustained as expenditure pressures intensify in the second half of the year.
It noted that although Nigeria’s public debt remained moderate and was expected to decline gradually, the cost of servicing existing debt continued to restrict the government’s ability to finance development priorities.
The warning raises questions about how effectively governments at all levels will manage increased revenue allocations, particularly as political activities and preparations for future elections could place additional demands on public funds.
The bank’s assessment suggests that higher revenue alone may not guarantee improved fiscal stability without stronger expenditure controls and more disciplined budget implementation.
Despite the fiscal concerns, the World Bank said Nigeria’s economy continued to expand, with real GDP growing by 4.2 per cent in the first half of 2026.
The growth rate was slightly above the average of four per cent recorded in 2024 and 2025.
The institution said high-frequency economic indicators pointed to continued expansion through the third quarter of 2026, despite persistent pressure from higher fuel costs.
However, it stressed that maintaining growth and ensuring that its benefits reach more Nigerians would require sustained macroeconomic stability and structural reforms capable of improving productivity and encouraging private investment.
It identified improved infrastructure, human capital development, a better business environment, stronger competitive discipline and reduced insecurity as critical priorities.
The bank also emphasised the need to create conditions that would enable businesses to expand, attract investment and generate productive employment.
The World Bank warned that progress in reducing inflation had been interrupted by higher oil prices following the outbreak of the Middle East conflict.
According to the report, Nigeria’s year-on-year headline inflation fell from 27.6 per cent in January 2025 to 15.2 per cent in December 2025, supported by tight monetary policy and reduced exchange-rate volatility.
However, inflation hovered around 15.5 per cent from February 2026, as rising fuel prices and the lean agricultural season pushed up the cost of goods and services.
Food inflation remained particularly troubling, rising to 19.6 per cent in August 2026 from 8.9 per cent in January.
The figures underscore the continuing pressure on household purchasing power, particularly among low-income earners who spend a substantial proportion of their income on food and other basic necessities.
The bank noted that the Central Bank of Nigeria cut its monetary policy rate by 350 basis points to 23 per cent in September 2026 after maintaining its policy parameters unchanged for several months.
World Bank advises CBN on monetary policy
The institution said monetary policy transmission had improved but maintained that 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 monetary policy implementation.
The bank said these measures could strengthen the effectiveness of monetary policy and improve the transmission of policy decisions to the wider economy.
External position improves, but risks persist
Nigeria’s external position also strengthened during the period under review.
The World Bank reported that the country’s current account surplus increased to $12bn, equivalent to seven per cent of GDP, in the first half of 2026, compared with $8.6bn, or 6.7 per cent of GDP, in the corresponding period of 2025.
The improvement was driven by higher oil export earnings and lower oil imports.
However, the bank warned that reserve accumulation continued to depend partly on short-term foreign portfolio investments, amid limited repatriation of oil export proceeds and low levels of foreign direct investment.
It said sustaining external stability would require continued exchange-rate flexibility, lower inflation, a deeper foreign exchange market and reforms capable of attracting more stable, long-term investment.
The World Bank projected average economic growth of 4.4 per cent between 2026 and 2028, while inflation is expected to decline to about 12 per cent by 2028.
Poverty reduction remains a challenge
Despite the positive growth outlook, the bank said poverty remained elevated and warned that faster economic expansion would not automatically translate into substantial improvements in living conditions.
It identified lower inflation, more productive employment opportunities, improved electricity supply, access to essential public services and more effective social protection programmes as necessary conditions for reducing poverty.
The institution also listed global economic volatility, election-related spending, a prolonged conflict in the Middle East and insecurity as major threats to Nigeria’s economic outlook.
Climate-related risks, including drought, heat stress and flooding, were also identified as potential threats to agricultural production, food prices and household livelihoods.
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