Nigeria Faces Stagflation Risk As Global Tensions Drive Cost Pressures

Nigeria’s economy may be heading toward a stagflationary phase in the second quarter of 2026 as rising global energy prices, persistent domestic cost pressures, and mounting political risks threaten recent gains in macroeconomic stability, according to the Centre for the Promotion of Private Enterprise (CPPE).

In its Q1 2026 economic review and Q2 outlook released on Sunday, the CPPE said while key macroeconomic indicators have improved markedly in recent months, the outlook remains fragile and increasingly exposed to both external shocks and domestic structural constraints.

The think tank warned that escalating, geopolitical tensions, particularly in the Middle East, have driven crude oil prfices above $100 per barrel, posing a dual-edged risk for Nigeria.

Although higher oil prices could boost export earnings, foreign exchange inflows and government revenues, they are also expected to transmit quickly into higher domestic fuel, transportation and production costs, thereby intensifying inflationary pressures.

“The current disinflation trajectory is fragile and vulnerable to reversal,” the CPPE noted, adding that the pass-through effects of rising energy costs could erode real incomes, weaken consumer demand and constrain output growth, key conditions associated with stagflation.

The warning comes against the backdrop of notable macroeconomic improvements recorded in the first quarter of the year.

Headline inflation, which stood above 24 per cent in early 2025, declined to 15.15 per cent in December 2025 and further moderated to about 15.06 per cent by February 2026, reflecting tighter monetary conditions, improved exchange rate stability and easing supply-side pressures.

Similarly, the naira stabilised within a relatively narrow band of between N1,340 and N1,430 per dollar in the official market during the period, reducing exchange rate volatility and helping to moderate imported inflation.

External reserves also strengthened significantly, rising above $50 billion, supported by improved oil earnings and enhanced foreign exchange liquidity.
Economic growth remained resilient, with real Gross Domestic Product (GDP) expanding by 4.07 per cent year-on-year in the fourth quarter of 2025, bringing full-year growth to 3.87 per cent.

The expansion was driven by recovery in the oil sector and sustained growth in the non-oil economy, while business activity indicators, including the Purchasing Managers’ Index (PMI), remained above the 50-point threshold, signaling continued expansion.
Reflecting these improvements, the Monetary Policy Committee in February reduced the benchmark interest rate by 50 basis points to 26.5 per cent, marking the beginning of a cautious easing cycle.

Despite these gains, the CPPE stressed that conditions in the real economy remain challenging. High energy and transportation costs continue to weigh heavily on businesses and households, while the lingering effects of fuel subsidy removal and exchange rate liberalisation have significantly eroded purchasing power.

The report highlighted energy costs as a major constraint, noting that unreliable grid electricity has forced businesses to rely heavily on diesel, petrol and gas-powered generators, thereby increasing production and logistics costs across sectors.

Persistent insecurity, particularly in key agricultural regions, is also disrupting food supply, sustaining inflationary pressures and undermining rural economic activity.

Access to credit remains limited, with high lending rates constraining investment, especially for small and medium-sized enterprises (SMEs), while weak consumer demand continues to dampen output across several sectors.

Looking ahead to the second quarter, the CPPE expects exchange rate stability to be largely sustained, supported by improved reserves and foreign exchange liquidity, but warned that volatility risks remain in the event of prolonged geopolitical tensions or shifts in investor sentiment.

Economic growth is projected to remain positive but moderate, as elevated cost pressures and weak demand conditions continue to constrain expansion. The think tank cautioned that the combination of persistent inflationary pressures and slowing growth could deepen stagflation risks if not carefully managed.

On monetary policy, the CPPE said the scope for further easing appears limited due to renewed inflation risks, particularly those linked to rising global energy prices.

It cautioned against additional monetary tightening, arguing that the current inflationary trend is largely cost-driven and may not respond effectively to higher interest rates.
“Further tightening could exacerbate constraints on investment and credit expansion without addressing the underlying drivers of inflation,” the report stated.

The outlook is further complicated by rising political activity ahead of the 2027 general elections. The CPPE warned that increasing political pressures could distract from economic management, slow reform momentum and weaken fiscal discipline.

It also raised concerns about the implementation of the 2026 budget, estimated at ₦68 trillion, citing risks related to weak revenue performance, delays in capital releases, limited execution capacity and growing political influence on spending priorities.

For businesses and investors, the CPPE advised a shift toward resilience and risk management strategies. It urged firms to prioritise cost containment, invest in alternative energy sources, strengthen foreign exchange risk management and maintain strong liquidity buffers in a high-interest-rate environment.
Investors, it added, should focus on sectors with strong demand fundamentals, pricing power, export potential and policy support, while closely monitoring political and macroeconomic developments.

The CPPE concluded that while Nigeria has made significant progress in restoring macroeconomic stability, the sustainability of these gains will depend on effective policy management, structural reforms and the ability to navigate emerging global and domestic risks.

“The economy is at a critical juncture,” the report noted, “where consolidating stability gains must go hand-in-hand with addressing structural bottlenecks and protecting vulnerable segments of the population.”