The World Bank has warned that increased spending by state governments ahead of the 2027 general elections could push Nigeria’s overall fiscal deficit higher in 2026, despite improved government revenues from oil and other sources.
In its latest Nigeria Development Update (NDU), titled Beyond the Federal Purse: How Higher Revenues Reshaped State Priorities, the bank projected that Nigeria’s consolidated fiscal deficit would rise from 3.1 per cent of gross domestic product (GDP) in 2025 to 3.5 per cent in 2026.
The institution attributed the expected increase to stronger capital spending by state governments, rising federal personnel and interest expenses, and additional spending linked to the approaching elections.
“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.
A consolidated fiscal deficit represents the difference between the combined revenue and expenditure of the federal, state and local governments.
Higher Oil Revenue Offers Limited Relief
The World Bank said higher oil prices following the outbreak of conflict in the Middle East had supported government revenue and strengthened Nigeria’s external position.
However, it noted that existing commitments relating to oil sales and financing had limited the benefits available to government finances.
At the federal level, the fiscal deficit improved from five per cent of GDP in the first half of 2025 to four per cent during the corresponding period of 2026.
According to the report, the improvement was “supported by higher federation revenue distributions, stronger Federal Government of Nigeria (FGN) independent revenues, and slow reported capital execution”.
Despite the improvement, the bank cautioned that rising expenditure later in the year could reverse some of the progress made in managing the country’s finances.
It added that although public debt remained moderate and was expected to decline gradually, high debt-servicing costs continued to limit the government’s financial flexibility.
Nigeria’s Economy Grows by 4.2%
The World Bank said Nigeria’s economy remained resilient, 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.
It also reported that high-frequency economic indicators pointed to continued expansion during the third quarter of 2026, despite pressure from higher fuel costs.
However, the institution stressed that stronger and more inclusive economic growth would require continued reforms to improve productivity and encourage private investment.
It identified better infrastructure, investment in human capital, an improved business environment, stronger competition and reduced insecurity as important priorities for achieving sustainable growth.
World Bank Raises Concern Over Inflation
The bank warned that Nigeria’s progress in reducing inflation had been interrupted by higher oil prices following the outbreak of the Middle East conflict.
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, the downward trend weakened in 2026.
“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,” the report stated.
Food inflation also remained a concern. The report put food inflation at 19.6 per cent in August 2026, compared with 8.9 per cent in January.
The World Bank said further progress would require improvements in monetary policy implementation and greater effectiveness in managing liquidity.
Among its recommendations, the institution called for reducing reliance on the high cash reserve ratio, continuing to narrow the interest rate corridor, separating liquidity management from reserve accumulation objectives and improving transparency in policy implementation.
The report also noted that the Central Bank of Nigeria reduced its monetary policy rate by 350 basis points to 23 per cent in September 2026 after leaving its policy parameters unchanged for several months.
World Bank Advises CBN on Monetary Policy
The institution said the transmission of monetary policy had improved but noted that structural features of the existing framework continued to limit its effectiveness.
It recommended further reforms to help monetary policy influence borrowing costs, credit conditions and broader economic activity more effectively.
The bank’s recommendations come as policymakers attempt to balance efforts to control inflation with the need to support economic growth and investment.
Nigeria’s External Position Improves
Nigeria’s external position strengthened during the first half of 2026, with the current account surplus rising to $12 billion, equivalent to seven per cent of GDP.
This compared with $8.6 billion, or 6.7 per cent of GDP, recorded during the same period a year earlier.
The World Bank attributed the improvement to increased oil export earnings and lower oil imports.
However, it warned that the accumulation of foreign reserves continued to depend partly on short-term foreign portfolio investment.
The report linked this vulnerability to limited repatriation of oil export proceeds and low levels of foreign direct investment.
To maintain external stability, the bank recommended further reductions in inflation, continued exchange-rate flexibility, a deeper foreign exchange market and reforms aimed at attracting longer-term capital.
Growth Expected to Average 4.4% Through 2028
The World Bank projected that Nigeria’s economy would grow by an average of 4.4 per cent between 2026 and 2028, while inflation was expected to ease to around 12 per cent by 2028.
Despite the positive growth outlook, the institution warned that poverty remained high and that economic expansion alone would not be sufficient to improve living conditions for millions of Nigerians.
It said faster poverty reduction would depend on lower inflation, the creation of more productive jobs, improved access to electricity and essential public services, and stronger social protection programmes.
The bank also identified global economic volatility, election-related spending, a prolonged conflict in the Middle East and insecurity as major risks to Nigeria’s economic outlook.
In addition, it warned that drought, extreme heat and flooding could reduce agricultural output, push food prices higher and worsen the livelihoods of vulnerable households.
The report therefore stressed the need for Nigeria to maintain macroeconomic stability, strengthen public finances and continue structural reforms while addressing the economic challenges facing households and businesses.
