….Faster growth, stronger external reserves and rising government revenues signal an improving macroeconomic outlook, but persistent inflation and shifting state spending priorities complicate the path to poverty reduction.
By Charles IKE-OKOH
MON OCT 12 2026-theGBJournal| Nigeria’s economic recovery is gathering pace, but the improvement in headline indicators has yet to settle a more consequential question: how quickly will stronger public finances and faster growth translate into better living standards for millions of Nigerians?
The economy grew by 4.2% in the first half of 2026, foreign exchange reserves exceeded $54 billion in September and state governments received substantially higher revenues following a series of economic reforms.
Yet inflation remains a drag on household purchasing power, while the allocation of additional public resources raises questions about whether the recovery is investing sufficiently in the people it is intended to benefit.
The contrast sits at the heart of the latest Nigeria Development Update (NDU) by the World Bank, which presents an economy showing greater resilience alongside persistent challenges in translating macroeconomic improvements into broad-based prosperity.
Titled “Beyond the Federal Purse: How Higher Revenues Reshaped State Priorities,” the report examines how reforms have expanded the resources available to state governments and how those governments have deployed the additional funds.
Its central message is twofold: Nigeria’s reform programme is generating significant fiscal and economic gains, but sustaining the momentum will require more efficient public spending, stronger service delivery and a clearer connection between economic growth and household welfare.
Growth strengthens, but the cost-of-living crisis remains a test
Nigeria’s real gross domestic product grew by 4.2% in the first half of 2026, up from 3.9% and 3.5% in the corresponding periods of 2025 and 2024, respectively.
The expansion was driven largely by services, alongside a stronger contribution from agriculture. According to the World Bank, the improvement in growth helped stabilise the poverty rate for the first time since 2019.
The external accounts also strengthened.
Nigeria’s current account surplus rose to $12 billion, equivalent to 7.1% of GDP, in the first half of 2026, compared with $8.6bn, or 6.7% of GDP, a year earlier.
Gross external reserves climbed above $54 billion in September, supported largely by foreign portfolio inflows, while ongoing reforms improved the functioning of the foreign exchange market.
These developments suggest that the economy is becoming more resilient after years of foreign exchange pressures and macroeconomic instability.
But stronger growth and improved external balances tell only part of the story.
For households, the recovery is experienced through food prices, transport costs, housing expenses, school fees and access to healthcare. For businesses, it is reflected in operating costs, access to finance, demand and the ability to expand employment.
The distinction is particularly important in an economy where previous inflationary pressures have significantly raised the cost of living.
Headline inflation fell sharply from 27.6% in January 2025 to 15.2% in December 2025, supported by tight monetary policy and reduced exchange rate volatility.
However, higher fuel prices following the onset of the conflict in the Middle East, combined with food price pressures during the lean season, slowed further progress.
Inflation remains elevated and continues to weigh on purchasing power.
A declining inflation rate does not mean that prices are falling. It means that prices are rising more slowly.
Even if inflation moderates further, households may continue to face substantial financial pressure if wages and other incomes fail to recover the purchasing power lost during the preceding period of rapid price increases.
The World Bank’s finding that poverty has stabilised is therefore significant, but it should not be confused with a sustained reduction in deprivation.
The next test is whether economic growth can generate enough productive employment and income growth to make essential goods and services more affordable relative to what households earn.
Oil windfall strengthens the macroeconomic picture
The conflict in the Middle East has had mixed effects on Nigeria’s economy.
Higher oil prices strengthened export earnings, contributed to a larger current account surplus and boosted government revenues.
However, the fiscal benefits were moderated by existing oil pre-commitments under forward sales and oil-backed financing arrangements.
The increase in oil prices also complicated the domestic inflation outlook by raising fuel costs.
This creates a familiar dilemma for an oil-dependent economy: higher international prices can improve the government’s revenue position while increasing costs elsewhere in the domestic economy.
The strength of Nigeria’s external position will therefore depend not only on oil prices but also on the durability of reforms, the performance of non-oil exports, the stability of capital flows and the country’s capacity to generate more sustainable sources of foreign exchange.
Foreign portfolio inflows have supported the increase in reserves, but such flows are sensitive to changes in global financial conditions and investor sentiment.
For policymakers, the opportunity is to use the current improvement to strengthen economic resilience, attract longer-term investment and expand productive capacity rather than rely on favourable oil prices to sustain the recovery.
The macroeconomic gains are real. Their durability, however, will depend on the extent to which they are supported by deeper structural improvements.
State governments receive more money. What happens next?
The most consequential finding in the World Bank’s latest update concerns the scale of the fiscal transformation at the state level.
Between 2023 and 2025, gross federation revenues increased by 69% in real terms, largely reflecting exchange-rate reforms, the removal of the petrol subsidy and stronger revenue administration.
States recorded the largest increase in federation revenue flows.
They benefited from higher statutory allocations, refunds, the settlement of longstanding federal obligations, dedicated intervention funds and stronger value-added tax collections.
Aggregate state revenues rose by about 93% in real terms between 2023 and 2025, measured at 2019 constant prices. Expenditure increased by approximately 92% over the same period.
The increase has significantly expanded the fiscal room available to state governments, creating opportunities to address infrastructure deficits, improve public services and invest in local economic development.
Yet a larger budget does not automatically produce better development outcomes.
The crucial question is whether the additional resources are being converted into productive investments, improved services and measurable gains in citizens’ welfare.
The World Bank’s expenditure analysis offers an important indication of the priorities emerging from this fiscal expansion.
Infrastructure spending rises as education loses budget share
State governments have directed a substantial portion of their additional resources towards economic infrastructure.
Capital expenditure increased, with its share of total state spending rising from 46% to 61%.
Transport infrastructure accounted for the largest increase, alongside substantial increases in spending on housing, agriculture and other growth-enhancing investments.
The shift has an economic rationale. Better roads and transport networks can reduce logistics costs, connect producers to markets and improve the operating environment for businesses. Investments in agriculture and housing can also support economic activity and employment.
But the composition of spending raises questions about the balance between physical infrastructure and the social investments required to sustain long-term growth.
The World Bank reports that spending on health, education and social protection also increased substantially, although more slowly than expenditure on economic infrastructure.
Education’s share of total expenditure declined from 14.9% in 2021 to 12.1% in 2025, while health spending remained broadly stable at around 7%. Social protection’s share increased from 1.4% to 4.4% over the same period.
The figures do not establish that real education spending fell or that service quality deteriorated. A decline in budget share can occur even when actual expenditure increases, provided spending elsewhere grows faster.
Nevertheless, the trend raises an important question about the development returns from the additional revenue.
Infrastructure can improve productivity, but its benefits are amplified when workers have the skills, health and opportunities needed to participate in a growing economy.
Roads alone cannot resolve gaps in educational attainment, inadequate healthcare or the shortage of productive jobs.
The challenge is not to choose between infrastructure and social spending. It is to ensure that investments in both reinforce each other.
That requires more than allocating larger sums to projects. It requires evidence that public investments are completed, maintained and delivering the economic and social benefits for which they were designed.
The World Bank’s warning: Revenue gains must translate into better services
“The bold macroeconomic reforms have substantially increased fiscal revenues at the state level, providing a unique opportunity to improve infrastructure, education, healthcare, and water services, which are critical to creating more and better jobs.
Strengthening spending efficiency, accountability, and service delivery will be essential to ensuring that public resources improve the lives of Nigerians.”
— Mathew Verghis, World Bank Country Director for Nigeria.
The statement captures the central policy challenge facing state governments.
The reforms have increased the resources available to them, but the developmental value of those resources will depend on spending efficiency, accountability and the quality of public services.
States have made significant efforts to improve fiscal reporting and transparency, while expanding internally generated revenue (IGR).
The World Bank identifies further improvements in expenditure efficiency and revenue mobilisation as important next steps.
Stronger internally generated revenue could make state finances more resilient, particularly if oil prices weaken or transfers from the Federation Account become less buoyant.
But additional revenue mobilisation must be accompanied by disciplined expenditure and demonstrable results. Publishing budgets and reporting allocations are important, but accountability also requires evidence of completed projects, improved services and better outcomes for citizens.
The distinction between spending and results is especially important when public revenues rise rapidly.
Governments may have more money available without necessarily having the institutional capacity to spend it effectively.
Weak procurement, poor project selection, inadequate maintenance and limited monitoring can reduce the economic returns from public investment.
The next phase of reform must therefore focus not only on how much revenue governments collect, but also on what each additional naira achieves.
Growth forecasts offer hope, but poverty reduction is not guaranteed
The World Bank projects that Nigeria’s economy will grow by an average of 4.4% between 2026 and 2028. Inflation is expected to decline gradually to about 12% by 2028, while poverty is projected to begin falling gradually.
The outlook suggests that sustained macroeconomic reforms could support further improvements in economic stability.
But the forecasts do not guarantee a rapid recovery in living standards.
The pace of poverty reduction will depend on whether growth generates productive jobs, whether real incomes improve and whether households gain better access to essential services.
It will also depend on the ability of the private sector to expand investment and employment in an environment where infrastructure constraints, financing costs and the purchasing power of consumers remain important considerations.
For Nigeria, the quality of growth matters as much as its pace.
An economy can expand without generating sufficient employment opportunities or distributing the gains widely.
Similarly, governments can collect more revenue without achieving a commensurate improvement in education, healthcare and other essential services.
The World Bank’s projections should therefore be read as an indication of the progress that may be possible if reforms are sustained and complemented by more effective public spending and private-sector-led growth.
The next test is at household level
Nigeria’s macroeconomic indicators are improving. Growth is strengthening, external reserves have risen and state governments have acquired substantially greater fiscal capacity.
These are important gains after a period of considerable economic adjustment. But the relationship between macroeconomic recovery and household welfare is neither immediate nor automatic.
Inflation can moderate while the accumulated cost of living remains high. Government revenues can rise while the quality of public services remains uneven. Infrastructure spending can expand without generating sufficient employment or productivity gains.
The latest Nigeria Development Update highlights both the opportunity created by reform and the challenge of converting it into lasting development.
For state governments, the priority is to ensure that increased revenues finance investments that reduce the cost of doing business, strengthen human capital, improve public services and create more productive employment.
For the broader economy, sustaining the recovery will require reforms that encourage private investment, improve productivity and make growth more inclusive.
Ultimately, the success of Nigeria’s economic adjustment will not be measured solely by GDP growth, foreign reserves or the size of allocations to state governments.
It will be measured by whether households can afford more of what they need, whether businesses can create better jobs and whether public spending delivers services that improve the quality of life.
Nigeria’s macroeconomic recovery is gaining ground. The decisive test is whether the gains can reach households faster than the pressures of inflation and the accumulated costs of economic adjustment.
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