Nigeria’s recovery faces its biggest test yet

Nigeria enters the second half of 2026 with something rare for much of the past decade: macroeconomic stability.

Inflation has more than halved from its 2024 peak. The naira has largely stabilised after years of volatility. External reserves have climbed above $50 billion, while economic growth has remained resilient despite one of the most aggressive monetary tightening cycles in the country’s history.

For businesses and investors, however, the bigger question is no longer whether the economy has stabilised. It is whether that stability can survive the twin pressures of resurgent inflation and an election cycle that has historically reshaped Nigeria’s economic trajectory.

The second half of 2026 will provide the clearest test yet of President Bola Tinubu’s reform programme. It will determine whether the gains recorded over the past two years represent the beginning of a durable economic recovery or merely a temporary period of stability before familiar political and inflationary pressures re-emerge.

The recovery is real

The first half of 2026 offered some of the strongest evidence yet that Nigeria’s macroeconomic reforms are beginning to filter through the real economy.

Gross domestic product expanded by 3.89 percent year-on-year in the first quarter, extending the steady recovery that began in 2025 when growth accelerated to 3.13 percent from 2.27 percent a year earlier.

While still below the Central Bank of Nigeria’s full-year growth projection of 4.49 percent, the expansion suggests that businesses are gradually adjusting to a post-subsidy, market-driven economy.

Growth was broad-based. Agriculture expanded by 3.15 percent, a marked improvement from just 0.07 percent in the corresponding period of 2025. Industry grew by 3.50 percent, while services, which remain the largest contributor to output, expanded by 4.31 percent.

The completion of the National Bureau of Statistics’ GDP rebasing exercise further reinforced that picture. Using 2019 as the new base year, nominal GDP rose to about $243.3 billion, restoring Nigeria’s position as Africa’s fourth-largest economy and offering investors a more accurate picture of where economic activity is taking place.

Perhaps more importantly, inflation, which had become the single biggest threat to household incomes and business planning, appeared to be coming under control.

Following sustained monetary tightening by the Central Bank, headline inflation declined for eleven consecutive months, falling from around 34 percent in 2024 to 15.06 percent by February 2026. The improvement reflected higher interest rates, greater exchange-rate stability, improved food supply in several agricultural regions, and statistical base effects following the rebasing of the Consumer Price Index.

For financial markets, the decline carried an important signal. It suggested that Nigeria might finally be moving from a crisis-management phase towards one where monetary policy could begin supporting growth rather than simply fighting inflation.

That expectation shaped investor sentiment throughout the first quarter.

Inflation returns at the worst possible time

The optimism did not last.

Beginning in March, inflation began climbing again.

Headline inflation rose from 15.06 percent in February to 15.38 percent in March, 15.69 percent in April and 15.93 percent in May, marking its highest level since November 2025.

On paper, those increases appear modest. For policymakers, however, they represent something more significant: a reminder that Nigeria’s disinflation process remains fragile.

Unlike the inflation shocks of 2023 and 2024, which were largely driven by exchange-rate adjustments and subsidy reforms, the current pressures are increasingly structural.

The escalation of tensions in the Middle East pushed global crude prices higher, increasing domestic fuel costs despite expanding local refining capacity. Higher transport costs quickly filtered through to food prices, while persistent insecurity across parts of the Middle Belt and North-West continued to disrupt agricultural production.

Food inflation accelerated to 17.8 percent in May, while core inflation, which excludes food and energy, also climbed to 16.82 percent.

The implication is important.

Nigeria’s inflation story is no longer simply about the exchange rate.

It is increasingly about logistics, energy costs, food supply, security, and domestic production constraints—problems that monetary policy alone cannot solve.

That shift explains why economists increasingly believe the next phase of disinflation will prove considerably harder than the first.

The easy part of monetary policy may already be over

Against the backdrop of falling inflation earlier in the year, the Central Bank reduced the Monetary Policy Rate by 50 basis points to 26.5 percent at its February Monetary Policy Committee meeting, the first rate cut in more than two years.

Markets interpreted the decision as the beginning of a gradual easing cycle.

Lower borrowing costs were expected to support investment, improve corporate financing conditions. and strengthen economic growth after a prolonged period of restrictive monetary policy.

The renewed rise in inflation has complicated that outlook.

Instead of asking how quickly rates will fall, investors are once again asking whether additional easing will happen at all this year.

The shift has also been reflected in international forecasts.

The International Monetary Fund revised Nigeria’s 2026 growth forecast down to 4.1 percent, while S&P Global cut its projection to 3.7 percent and warned that persistent inflation across emerging markets could delay monetary easing and weigh on investment.

For financial markets, this changes the investment landscape.

Higher-for-longer interest rates would continue supporting yields in Nigeria’s fixed-income market and preserve positive real returns that have helped attract foreign portfolio inflows. At the same time, prolonged borrowing costs would increase financing pressures on manufacturers, consumer goods companies and other sectors reliant on credit.

Banks, by contrast, could remain among the biggest beneficiaries of an extended high-rate environment.

Election spending could become the economy’s biggest wildcard

If inflation represents the immediate challenge, politics may become the defining one.

Nigeria has entered the early stages of preparations for the 2027 general elections, and history suggests that election cycles rarely leave the economy untouched.

Pre-election periods have typically been characterised by stronger government spending, increased borrowing, higher liquidity and accelerated infrastructure projects. Those trends often support short-term economic activity but can also fuel inflation, widen fiscal deficits and increase pressure on foreign exchange markets.

The signs are already emerging.

Samuel Oyekanmi, chief research officer at Norrenberger, says the Federal Government’s borrowing plans for the third quarter point to a noticeable increase in spending.

“The borrowing plan of the federal government for Q3 already indicates increased spending activities, which is good in driving broad-based economic growth, especially from an infrastructural development point of view,” he said.

That spending could provide a near-term boost for sectors linked to construction, infrastructure, financial services, and telecommunications.

The risk is that stronger fiscal expansion collides with an economy that is still struggling to bring inflation fully under control.

If liquidity rises faster than productive capacity, the Central Bank could find itself attempting to offset fiscal stimulus with tighter monetary conditions,a familiar policy mix that has repeatedly complicated Nigeria’s macroeconomic management.

Where investors are looking now

For investors, the second half of 2026 is becoming less about whether the economy is growing and more about the quality of that growth.

Oyekanmi expects the naira to trade between N1,350 and N1,500 per dollar, provided the Central Bank maintains policy discipline and positive real interest rates continue attracting foreign portfolio inflows.

He believes inflation could begin moderating towards the end of the third quarter if geopolitical tensions ease and the ceasefire involving Iran, Israel, and the United States holds, although insecurity, seasonal food shortages,  and election-related spending remain significant risks.

He also expects increased government borrowing to keep fixed-income yields elevated, encouraging investors to rotate part of their portfolios away from equities before broader market sentiment improves.

Zedcrest Research reaches a similar conclusion in its H2 2026 Nigeria Macroeconomic Outlook.

The firm argues that Nigeria is moving beyond exchange-rate-driven inflation towards a more structurally embedded cost environment.

Diesel prices remain one of the biggest drivers of food inflation because the country’s distribution network depends heavily on road transport. Electricity shortages continue forcing manufacturers to rely on expensive diesel generators, increasing production costs and feeding into core inflation.

According to the report, sustained moderation in inflation will depend less on currency stability and more on improvements in crude production, refinery efficiency, fuel availability, electricity supply and transport infrastructure.

Those are structural reforms that extend well beyond monetary policy.

The second half will determine whether reforms endure

Nigeria’s economy has unquestionably become more stable than it was two years ago.

The currency has steadied. Inflation has fallen significantly from its peak despite the recent rebound. Growth has remained positive, while external reserves have strengthened and investor confidence has gradually improved.

Those achievements suggest the country’s reform programme is beginning to establish a stronger macroeconomic foundation.

Yet the second half of 2026 will determine whether that foundation is resilient enough to withstand the pressures that have historically derailed previous recoveries.

Resurgent inflation, election-related fiscal expansion, and unresolved structural constraints are now replacing exchange-rate instability as the economy’s biggest challenges.

For businesses, the operating environment is likely to remain one of cautious expansion rather than rapid acceleration. For investors, opportunities increasingly lie in identifying sectors capable of benefiting from higher public spending while remaining resilient to elevated borrowing costs and persistent inflation.

The first half of the year was about proving that stability was possible.

The second half will determine whether Nigeria can convert that stability into sustained, broad-based growth—or whether the political economy of an election cycle once again interrupts the country’s path to recovery.(BusinessDay)