Nigeria's Economic Trajectory: Navigating Challenges Amidst Signs of Optimism

The year 2025 concluded with widespread apprehension across both corporate and public sectors regarding the global economic climate. This period was marked by a dynamic shift in market philosophies that disrupted supply chains and reorganised corporate structures, significantly influenced by the economic strategies of the United States and China.

Simultaneously, the non-profit sector faced instability due to the suspension of United States Agency for International Development (USAID) funding, placing many organisations in vulnerable positions. The international arena also saw growing instability, with prolonged conflicts in Ukraine and the Middle East fragmenting the global political and economic order. Regionally, a resurgence of military governance in West Africa introduced substantial socio-political uncertainty into an area previously considered a stable economic bloc.

These global and regional pressures, which characterised the start of 2025, unfortunately intensified throughout the year, projecting a challenging outlook for 2026. For Nigeria, often dubbed the 'giant of Africa,' its economic performance in 2025 was a product of sweeping reforms under President Bola Ahmed Tinubu, escalating domestic insecurity impacting agriculture, slow progress in implementing the African Continental Free Trade Area (AfCFTA), and a shifting global economic landscape.

The reforms initiated by the Tinubu administration, aimed at recalibrating the state's role and restructuring fiscal and monetary frameworks, include the removal of fuel subsidies, foreign exchange liberalisation, and tax system overhauls. While these systemic changes are acknowledged as structurally necessary, they have brought about immediate consequences such as heightened inflation, reduced consumer purchasing power, and increased business uncertainty. Inadequate communication around these reforms further fueled public concern.

A key issue with the reforms has been the misalignment between their implementation strategy and performance metrics, hindering their effective impact. Furthermore, these reforms are being enacted in a nation eager for transformation but acutely sensitive to immediate economic hardships. The insufficient consideration of these realities in the design and rollout of policies has constrained their effectiveness and could influence outcomes as the new tax regime takes hold.

Mounting insecurity across Nigeria has severely disrupted agricultural activities and the movement of goods and people, evolving from a social issue into a direct economic shock. This has led to decreased agricultural output, the abandonment of farmlands, increased rural-to-urban migration, soaring food prices, persistent inflation, and diminished rural incomes.

Given agriculture's vital role in employment, food security, and inflation, the prevailing insecurity has disproportionately affected Nigeria's socio- economic development. The slow progress in operationalising the AfCFTA also presents a challenge. While Nigerian services firms have expanded across the continent, the manufacturing sector has struggled to capitalize on AfCFTA opportunities and faces growing competition from more cost-effective production hubs in Africa.

The AfCFTA was envisioned to enhance market access, boost manufacturing, and support non-oil exports. However, its gradual implementation means Nigeria continues to rely on a narrow export base, businesses are unable to fully benefit from economies of scale and regional value chains, and imports and services continue to outpace tradable and value-adding production. This delays the structural transformation needed for inclusive, productivity-driven growth.

The global business environment has been reshaped by escalating geopolitical tensions and evolving governance norms. The intensified rivalry between the US and China has fragmented global markets, compelling countries and multinational corporations to re-evaluate supply chain dependencies. This has spurred policies like reshoring, near-shoring, and friend-shoring, favouring politically aligned nations over pure cost considerations.

Concurrently, global development finance has tightened. Increased investor caution, stricter monetary policies in developed nations, and shifting donor priorities have reduced access to concessional funding, while commercial borrowing costs have climbed. Ongoing conflicts further amplify global uncertainty and divert capital towards safer investments.

Collectively, these trends have made investors more selective, demanding greater scrutiny of country risk, policy consistency, and macroeconomic stability. For Nigeria, an economy reliant on imports and commodity exports, this environment poses significant challenges, limiting the capacity to attract foreign capital for growth and industrialisation.

Despite indicators suggesting a gradual economic recovery in 2025, the benefits have not significantly improved living standards. While 2026 forecasts project continued growth, significant structural, fiscal, and political obstacles remain.

The first quarter of 2026 is anticipated to involve considerable adjustment challenges, particularly for small and medium-sized enterprises (SMEs), as they navigate the new tax regime. This transition is likely to suppress productivity, disrupt cash flows, and delay investment decisions, with minimal short-term efficiency gains.

The inadequate implementation of the 2025 budget is expected to impact the first half of 2026, with a substantial portion of the capital budget being rolled over into the next fiscal year. This rollover, aimed at project continuity, highlights underlying fiscal governance issues, potentially stemming from liquidity shortages, procurement delays, or revenue shortfalls.

This underperformance suggests fiscal strain and limited government capacity for economic stimulus through capital spending or infrastructure projects. The government's increasing domestic borrowing also risks crowding out private sector access to affordable credit. While external reserves may show improvement, this often provides superficial exchange-rate stability that benefits importers more than exporters.

Private capital inflows are increasingly favouring portfolio investments like FGN bonds over equity or direct investment in productive sectors. This trend indicates that government borrowing is absorbing a significant portion of available capital, potentially at the expense of businesses focused on production and job creation.

Nigeria's economy remains heavily service-oriented, with the services sector contributing approximately 56-59% of GDP, driven by trade, telecommunications, finance, and transport. However, this dominance has not translated into substantial job creation. Many service activities, particularly in retail and informal sectors, offer limited quality employment and weaker productivity growth compared to manufacturing and industrial sectors.

This structure, coupled with infrastructure deficits and limited technology adoption, poses a structural barrier to sustainable and inclusive growth. Furthermore, the economy's continued dependence on crude oil, which accounts for over 90% of export earnings and a significant portion of government revenue, leaves it vulnerable to global price volatility and geopolitical risks.

While oil generates foreign exchange, its capacity to foster broad-based domestic value creation is limited, leading to import-driven growth that is insufficiently diversified. Efforts to improve local refining capacity and downstream oil and gas investments offer potential for domestic value addition. However, realizing this potential requires strategic interventions such as strengthening local content policies, improving access to finance for downstream players, developing industrial infrastructure, and ensuring regulatory clarity.

Without coordinated policies, the risk of continued reliance on crude oil exports and vulnerability to price shocks persists. The year 2026 also marks the beginning of the political campaign cycle, which historically shifts policy priorities towards short-term measures, potentially affecting fiscal discipline and long-term planning.

This political cycle can lead to policy uncertainty as investors adopt a cautious approach, fiscal relaxation through increased spending, and a potential stall in critical reform momentum. These factors could collectively dampen the impact of existing reforms and hinder Nigeria's progress towards inclusive and sustainable growth.

In conclusion, while the global economic landscape presents opportunities alongside uncertainties, Nigeria's path forward hinges on effectively managing its internal challenges. Weak budget execution, rising domestic debt, a service-driven economy, oil dependency, and the impending political cycle are significant constraints.

Strategic engagement with international partners, including the European Union, the United Kingdom, and China, could accelerate economic reforms, support industrialisation, and promote sustainable development. However, achieving sustained growth that translates into improved livelihoods requires a delicate balance between global engagement, domestic policy coherence, and proactive structural reforms.

The primary challenge for 2026 will be the capacity to translate reform intentions into socially sustainable, productivity-enhancing outcomes. Dipo Baruwa is a business climate development analyst.