The World Bank has warned that increased spending by state governments and pre-election expenditure could widen Nigeria’s consolidated fiscal deficit from 3.1 per cent of Gross Domestic Product (GDP) in 2025 to 3.5 per cent in 2026, despite higher oil revenues and increased government allocations.
In its latest Nigeria Development Update (NDU), titled: “Beyond the Federal Purse: How Higher Revenues Reshaped State Priorities,” the Bank said rising capital expenditure by states, alongside increased federal personnel costs, interest payments and election-related spending, would outweigh revenue gains.
“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 per cent of GDP in 2025 to 3.5 per cent in 2026, outweighing stronger revenues,” the Bank said.
The consolidated fiscal deficit represents the gap between total government revenue and expenditure across federal, state and local governments.
The report said higher oil prices following the conflict in the Middle East had supported government revenues and improved Nigeria’s external position, although existing oil sales and financing commitments had limited the fiscal benefits.
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 higher federation revenue distributions, stronger independent revenues of the federal government and slow reported capital budget execution.
However, it warned that rising expenditure pressures later in the year could reverse some of the fiscal gains.
Although public debt remains moderate and is expected to decline gradually, the report said high debt-service costs continued to constrain the government’s fiscal space.
Nigeria’s real GDP expanded 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 sustained and inclusive growth would require macroeconomic stability and continued structural reforms to improve productivity and private investment.
The bank identified better infrastructure, human capital development, an improved business environment, stronger competitive discipline and reduced insecurity as priorities for stronger economic growth.
The World Bank said Nigeria’s disinflation trend had been interrupted by higher oil prices following the outbreak of the conflict in the Middle East.
According to the report, inflation declined from 27.6 per cent year-on-year in January 2025 to 15.2 per cent in December 2025, supported by tight monetary policy and reduced exchange-rate volatility.
However, headline inflation hovered around 15.5 per cent year-on-year from February 2026, as higher fuel prices and the lean season exerted renewed pressure on prices.
Food inflation remained elevated at 19.6 per cent in August 2026, compared with 8.9 per cent in January.
The report also noted that the Central Bank of Nigeria reduced the Monetary Policy Rate by 350 basis points to 23 per cent in September 2026 after leaving its policy parameters unchanged for several months.
The bank said monetary policy transmission had improved, but structural features of 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 improved 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 corresponding period of 2025.
The bank attributed the increase to higher oil export proceeds and lower oil imports.
However, it warned that reserve accumulation continued to rely on short-term foreign portfolio investment, partly because of limited repatriation of oil export proceeds and low foreign direct investment.
It said sustaining external stability would require lower inflation, continued exchange-rate flexibility, a deeper foreign exchange market and reforms capable of attracting longer-term capital.
The World Bank projected that Nigeria’s economy would grow by an average of 4.4 per cent between 2026 and 2028, while inflation could ease to around 12 per cent by 2028.
Despite the projected growth, the bank said poverty remained elevated and called for lower inflation, more productive jobs, improved access to electricity and basic public services, and more effective social protection to accelerate poverty reduction.
It identified global volatility, election-related spending, a prolonged conflict in the Middle East and insecurity as major risks to the economic outlook.
The report also warned that drought, heat stress and flooding could weaken agricultural production, push up food prices and worsen livelihoods.
