- Projects Deficit To Climb From 3.1% To 3.5% Of GDP
- Oil Windfall Under Threat As States Ramp Up Spending
- Urges CBN To Ease Cash Reserve Ratio Burden
Nigeria’s fiscal gains are facing fresh pressure as rising state government spending, election-related expenditure and mounting federal obligations threaten to widen the country’s consolidated fiscal deficit to 3.5 per cent of Gross Domestic Product (GDP) in 2026, the World Bank has warned.
In a fresh warning that puts the spotlight on public spending ahead of the 2027 general elections, the global lender said the country’s consolidated fiscal deficit would rise from 3.1 per cent of GDP in 2025, despite improved oil revenues and increased allocations to governments.
The World Bank blamed the projected deterioration on stronger capital expenditure by state governments, alongside rising federal personnel costs, debt-interest payments and pre-election spending.
In its latest Nigeria Development Update (NDU), titled *Beyond the Federal Purse: How Higher Revenues Reshaped State Priorities*, the bank cautioned that mounting expenditure could erase the benefits of improved revenue mobilisation.
“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 warning raises fresh questions about the sustainability of public finances as political activities gather momentum ahead of the 2027 elections, with governments under pressure to deliver projects and meet rising obligations.
Revenue gains under threat
Although higher oil prices following the outbreak of conflict in the Middle East have boosted government earnings and strengthened Nigeria’s external position, the World Bank said the country had not fully translated the windfall into stronger fiscal outcomes.
Existing oil sales and financing commitments, it noted, had limited the benefits of higher prices, while expanding spending commitments threatened to undermine the gains.
At the federal level, however, the 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.
The improvement was driven by higher federation revenue distributions, stronger independent revenues generated by the Federal Government and slower reported capital budget execution.
But the bank warned that the improvement might not last as spending pressures intensify in the second half of the year.
It also noted that, although public debt remained moderate and was expected to decline gradually, elevated debt-servicing costs continued to squeeze the government’s fiscal space.
Growth holds firm, but inflation bites
Despite the fiscal concerns, the World Bank said Nigeria’s economy had maintained a resilient growth trajectory, with real GDP expanding by 4.2 per cent in the first half of 2026, slightly above the average of four per cent recorded in 2024 and 2025.
High-frequency indicators, it added, pointed to sustained economic expansion through the third quarter, despite persistent pressure from higher fuel costs.
However, the bank stressed that stronger and more inclusive growth would depend on protecting macroeconomic stability and sustaining structural reforms capable of raising productivity and attracting private investment.
It identified improved infrastructure, human capital development, a better business environment, stronger competitive discipline and reduced insecurity as critical to unlocking Nigeria’s economic potential.
The growth outlook, nevertheless, remains clouded by stubbornly high prices.
According to the report, inflation fell 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.
That downward trend has since stalled, with headline inflation hovering around 15.5 per cent year-on-year from February 2026, as higher fuel prices and seasonal food supply pressures pushed prices upward.
Food inflation remained particularly troubling, reaching 19.6 per cent in August 2026, compared with 8.9 per cent in January.
The Central Bank of Nigeria cut its monetary policy rate by 350 basis points to 23 per cent in September 2026 after holding its policy parameters unchanged for several months.
World Bank urges CBN to ease reserve burden
The lender also called for changes to the CBN’s monetary policy framework, arguing that, although the transmission of monetary policy had improved, structural constraints continued to weaken its effectiveness.
It recommended reducing reliance on the high cash reserve ratio, further narrowing the interest rate corridor, separating liquidity management from foreign reserve accumulation objectives and improving transparency in policy implementation.
The recommendations come amid efforts to sustain price stability while supporting economic activity and improving access to credit for businesses.
External position strengthens, but risks persist
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 World Bank attributed the increase to higher oil export proceeds and lower oil imports.
But it warned that the accumulation of foreign reserves continued to depend on short-term foreign portfolio investments, partly because of limited repatriation of oil export proceeds and low foreign direct investment.
To sustain external stability, the bank called for lower inflation, continued exchange-rate flexibility, a deeper foreign exchange market and reforms capable of attracting longer-term capital.
It projected average economic growth of 4.4 per cent between 2026 and 2028, while inflation is expected to ease to around 12 per cent by 2028.
Poverty remains a major concern
Beyond the headline economic figures, the bank warned that elevated poverty remained a major obstacle to inclusive growth.
It said faster poverty reduction would require lower inflation, the creation of more productive jobs, improved access to electricity and essential public services, as well as more effective social protection programmes.
The institution also flagged global economic volatility, election-related spending, a prolonged conflict in the Middle East and insecurity as major threats to Nigeria’s outlook.
Climate-related risks, including drought, extreme heat and flooding, could further weaken agricultural production, drive up food prices and deepen hardship for vulnerable households.
With the 2027 election cycle approaching, the World Bank’s central warning is clear: stronger revenues alone will not guarantee healthier public finances if governments allow spending commitments to outpace their capacity to pay.
The challenge for Nigeria’s federal, state and local governments will be to balance infrastructure investment and public obligations against the need to contain deficits, manage debt costs and protect the fragile gains in economic stability.
