Full deregulation, by allowing global oil supply disruptions to drive unrestricted price increases for domestic consumers, has significantly altered Nigeria’s 2026 budget. International energy market shocks, such as the closure of the Strait of Hormuz, have unexpectedly boosted oil revenue, thereby closing a previous gap, but this has simultaneously hindered growth in non-oil sectors.
Policymakers and budget planners have now learned that they have limited control over an economy increasingly influenced by global factors. They also know that economic performance is now more dependent on international events than domestic government actions, leading to greater uncertainty and risk for budget targets.
The oil sector has veered off budget targets for both production volume and price; the non-oil sector is shut out of the growth path intended to lead the economy to its highest growth rate in many years. Letting the economy float unguarded in a volatile world is underscored as the main reason why budgets fail.
Growth functions changing
Mining & quarrying activity, which is dominated by crude petroleum and natural gas, is expected to step up from 1.89 per cent real growth in the first quarter. The snag, however, is that this improvement will come at the expense of the more important non-oil sector in the GDP composition, given the inflationary effects of rising international oil prices on domestic energy costs.
An expected boost in the oil sector might be offset by a slowdown in the non-oil economy during the second quarter, indicating a shift in the economy’s growth patterns compared to the first quarter. Real GDP growth looks likely to slow down in the second quarter from the first quarter mark of 3.89 per cent – the strongest GDP growth record for the Nigerian economy since the 4th quarter of 2021.
S&P Global Ratings has revised Nigeria’s real GDP growth projection for 2026 down from 4.0 percent to 3.7 percent on concerns of oil price-driven inflation weighing heavily on household consumption, thereby undermining the very economic activities expected to drive GDP growth. It attributes the markdown primarily to a stronger-than-expected pass-through of international oil prices to Nigeria’s domestic energy costs, which have spurred domestic inflation.
Real GDP Growth %
Oil and gas industry is expected to improve from 2.57 percent real growth rate in the first quarter, as average output peaked in the region of 1.71 million barrel per day (mbpd) in May, the highest oil production mark in several years. This is a sustaining improvement from the first quarter average production level of 1.55 mbpd and April’s 1.66 mbpd output.
The Oil sector’s contribution to GDP is expected to improve in the second quarter from 3.92 percent in the first quarter and might exceed the 3.97 percent mark in the fourth quarter of 2025.
Petroleum and gas account for more than 91 percent of output in the sector and further gains in production volume look quite likely in June. Oil sector’s contribution of 4.14 percent to real GDP in the first quarter is therefore very likely to be enhanced in the second quarter.
Oil gains and pains
But a stronger growth of a low GDP contributing oil sector and a slowdown of the GDP leading non-oil sector points clearly to less than expected economic growth for the year with far different outcomes for output, employment and consumption.
Nigeria’s production of crude oil and condensate slightly beats its OPEC’s quota but remains nowhere close to the government’s ambitious target of 1.84-2.06 mbpd for the 2026 national budget. Yet, the gains in output with price increase has added some new strength to the economy that was unexpected from the pre-adjusted $64.85 per barrel budget benchmark.
The gains of the oil sector have come with the pains of undermining the activities on non-oil activities on which the hopes for a strong real GPD growth of 4.2 – 4.4 per cent for 2026 rested. High inflation with its stifling assault on household consumption and economic activity is the adverse connecting rod.
Oil Real GDP Growth %
The positive effects of the upturn in oil output and prices on the economy are largely countered, even overshadowed by the nation’s high consumption of the same petroleum products at the increased prices. This development has altered the conditions in which non-oil sector was projected to lead economic growth in 2026.
Fiscal space depleted
Non-oil sector expansion had been envisioned on the basis of moderate fiscal stimulus and policy reforms boosting employment with consumer spending power against firm monetary policy keeping inflation in check. The hike in oil prices has come as a spanner in the works so that the path laid out for the economy isn’t followed.
Any fiscal stimulus gets lost in the oil-driven high inflation, striping consumers of purchasing power and bringing companies under new pressure to cut jobs to save costs due to inability to sell what they produce.
The non-oil sector remains dominant of real output for the economy but gains in industry, agriculture and services that spurred real GDP growth in the first quarter may weaken in the second quarter.
Budget numbers themselves aren’t that promising in terms of fiscal space needed to stimulate the economy to deliver 4 per cent or more real GDP growth. Despite some reduction, debt servicing remains large at N15 trillion – nearing one-half of total revenue target of ₦34.33 trillion that is read as a tall order.
Also constraining government’s fiscal capacity is huge non-debt recurrent expenditure that consumes another N15.25 trillion, meaning that the revenue projection is virtually consumed. Yet, with significant revenue losses coming from crude oil production shortfall, part of the recurrent expenditure may have to be borrowed. Direct government investment of revenue for domestic economic capacity building remains a closed path for many years and counting.
Further depleting the fiscal space are numerous arbitrary constituency-level projects the National Assembly normally loads the budget with. This usually bloats fiscal deficits and borrowing requirements with unaccountable projects and limits the fiscal space available for financing priority national development goals.
The attainment of total revenue target of ₦34.33 trillion may remain far-fetched even in spite of the unexpected rise in the international oil prices. Oil price increases aren’t going to be sufficient to dress up the ambitious output target for the year. Worse still will be non-oil revenue disappointment in reflection of the oil-driven inflationary effects on economic activity and consumer demand.
Industries under pressure
The industrial sector started on a strong growth pedestal with real GDP growth of 3.5 per cent, up on the growth of 3.42 per cent in the first quarter of 2025. The industry looked good to stay on the positive growth path across quarters for the third straight year after turning around from years of sustained declines in 2023.
Industrial enterprises however have come under pressure from failing consumer spending and rising input cost that tended to slow down production engines in the second quarter. The operating environment that enabled the sector’s real GDP growth to more than double quarter-on-quarter to 7.45 per cent in the second quarter of 2025 has changed significantly in 2026.
A significant year-on-year slowdown in industrial sector growth in real terms is expected in the second quarter, as sales stagnate and production costs escalate. Consumers are unable to consume what industries roll out and the inability to push sales has, in turn, weakened demand for industrial input and discouraged expansion plans.
Household consumption is a critical force in Nigeria’s economy and a loss of it can trigger overall economic decline. The problem is the pass-through of escalated international oil and energy prices to domestic energy costs. It is of cost push nature for which no monetary tightening solution can ever be found.
The adverse pressure within the sector has been reinforced by the multiplier effect of slowing growths in other sectors and industries to weaken the growth functions among the operators. High input cost and the unexpected rise in energy costs have added to high cost of finance to limit output gains and margins, leaving little or no room to drop prices to encourage consumer demand.
Industries, particularly the manufacturing group, are usually harder hit by operating volatility, as many operators here are yet to heal from two years of historic exchange losses that punctured bottom lines, drained off many years of retained earnings and smashed equity cushions of even the biggest players.
Manufacturing operations that led the industrial sector growth in the first quarter look set to lead its slowdown in the second quarter. Manufacturing activities had expanded by 3.29 per cent in real terms in the first quarter, which was driven by the more resilient cement manufacturers, food processors and chemical producers.
The steady recovery that saw manufacturing operations contribute 9.57 per cent of real GDP in the first half look quite likely to stall in the second half.
Industrial Sector Real GDP Growth %
Food supplies but no consumers
Agricultural sector – Nigeria’s largest production centre, grew by 3.15 per cent in the first quarter of 2026, a big upturn from a marginal increase of 0.07 per cent in the same quarter in 2025, though a decrease from the outstanding growth of 4 per cent in the last quarter of the year.
The sector’s output growth is led by forestry, which grew by 4.14 per cent over the period, but the sector is dominated by crop production that accounts for about 67 per cent of overall sector’s output. Crop production grew by 3.39 per cent in real terms, being powered by increased youth participation and mechanized farming.
However, the increased production and supplies of agricultural products isn’t matched by consumer spending boost, which is leaving lots of perishable products in the hands of farmers. With consumer spending capacity impaired by high inflation, households are shifting to affordable alternatives to what used to be basic food items on their tables.
Agricultural Sector Real GDP Growth %
Like industries, the situation leaves farmers in a production-consumption trap where high cost of input isn’t easily recoverable from consumers. This is a discouragement to new and existing investors, which is slowing down productive activities in the sector. The problem is that inflation has driven up cost at the production end and eroded the power to purchase what is produced on the other end of consumers.
The quarter-on-quarter slowdown of real growth in the agricultural sector can therefore be expected to sustain in the second half. Despite substantial price drops for the products, the ability to buy even the basic agricultural products remains a big challenge to the consuming public.
Banks too feel the pinch
The finance and insurance sector is still going strong with recent recapitalization programmes activating the sector’s real growth at 8.54 per cent in the first half. However, the banks are in a year of correction after two to three years of unprecedented prosperity during which earnings and balance sheets multiplied beyond expectations.
After vertical lifting of balance sheets and multiplication of revenues and profits over the preceding years, banks are coming back to earth to face the realities of revenue constraints against rising cost of funds and mounting credit losses.
Windfalls from foreign exchange and financial asset gains that powered banking revenues and profits in recent years are both out of the way this year. Rapid expansions of risk assets in the preceding years are paying back by way of huge, bad loan losses – which is hurting the principal income line of banks: interest earnings.
Neither interest income nor non-interest revenue is providing banks with the much-needed earnings to absorb cost increases and blow up the bottom line as they did in the years before. The ability to grow revenue and extract reasonable profit from it presents a big challenge to the banks this year.
Gross earnings are constrained by limited or no increase in credit volume and suspension of interest income from growing bad assets. On the other hand, pressure is rising from cost of funds and huge credit losses that have to be expensed from non-growing revenues.
Slowdown in revenue with cost increases sums up the operating environment of banks in 2026. This is constricting profit margins and leading to profit declines or major deceleration for banks in the year.
Monetary easing dreams fade
The Central Bank of Nigeria (CBN) has its hands tied so far in respect of monetary policy easing that was envisaged for the year in the face of oil price-driven high inflation. This has stalled any moves in the direction of reducing lending rates and improving credit conditions, which are the essential components of non-oil driven economic growth.
Anticipation of election-driven spending fueling inflation further may keep monetary policy stringent for the rest of the year, foreclosing the chance of employing monetary easing with enhanced fiscal space to prop up the non-oil economy. Should inflation remain stubborn, the CBN may even resort to raising interest rates, which would compel borrowers to call off new and expansion projects and pay off expensive loans.
Further constraining economic growth are persisting structural bottlenecks in electric power supply, high and rising cost of transporting people and goods due to high energy cost and worsening security conditions of the nation.
Electric power the missing link
Electricity and gas industry recorded a decline of 15.3 per cent in real terms in the first quarter – one of the worst-performing among sectors and industries. The decline testifies to gross inadequacy of Nigeria’s electric power infrastructures. This speaks volumes about the seriousness of budget planners to drive non-oil sector growth without strong growth in electric power output being the key element of the plan.
The strength to use industrial growth and business competitiveness to drive non-oil economic activities rests on how far persistent issues in electric power generation, transmission and distribution are resolved.
Stock market going cautious
Investor confidence on the capital market leans more on the side of caution, particularly as electoral cycle effect takes hold as from the second half of the year. Portfolio traders tend to take their leave of the market or scale down as a pre-emptive measure in the event of election-induced political crisis, which usually sets the stock market on a bearish turn.
Yet, the biggest ever public offers of Dangote Petroleum Refinery and Petrochemicals expected to raise $5 billion is planned for the same period that investors are more likely to be leaving than coming into the capital market. The interest in a public offer is the expectation that the stock would open at higher price at the end of the offer period, which may not be realised in a bearish market.
The stock market has traded bearish for most of June and may wear this outlook until half year earnings reports begin reaching the market towards the end of July. Corporate earnings reports for the second quarter may not be that exciting to the market, as increased input and energy costs can be expected to undermine profit deliveries for the period.
Apart from foreign traders taking steps to avoid political risk, electoral funding needs may also spur a lot of stock selling pressure by domestic players. Further stock selling pressure may also arise from investors and traders to sell their existing holdings in order to take advantage of primary market offer price of Dangote Petroleum Refinery and Petrochemicals.
A lot of uncertainties, driven mainly by increasing political risk, seem to await the stock market in the second half of the year. Should election-driven fears wear off investor confidence in the months ahead, a prolonged downturn may rule the stock market for the rest of the year.
