Nigeria’s inflation and reform tension shape outlook

Nigeria continues to signal a proactive reform momentum, characterized by increased transparency, gradual currency unification, and a notable re-entry into the global bond market in 2025. These efforts have modestly improved reserve buffers, with gross external reserves standing at approximately US$40 billion (about four months of imports) and a manageable sovereign debt level of ~39% of GDP.

However, these external and fiscal successes are being fundamentally undermined by entrenched structural headwinds, particularly severely elevated food costs that are rapidly eroding domestic purchasing power.

The core challenge lies in the dichotomy between headline inflation, which hovers near 13%, and food inflation, which remains stubbornly well above 20% year-on-year (y/y). This persistent gap suggests that the Central Bank of Nigeria’s (CBN) monetary policy actions are being heavily undercut by deep-seated cost-push and supply-side pressures.

The structural drivers of this high food inflation are well-known, encompassing chronic insecurity in key food-producing regions, crippling high transportation costs exacerbated by infrastructure deficits, and inconsistent policy execution in the agricultural sector.

The mechanism here is critical: for Nigeria’s population of ~220 million, where food constitutes a substantial portion of the consumer basket, inflation—especially in food—drastically reduces real incomes. This erosion of wealth severely constrains consumer demand, limiting economic expansion despite a projected real GDP growth of ~3.5% for 2025.

The CBN is caught in a difficult policy bind: further rate cuts, which are desired to stimulate growth, are politically challenging and unlikely until food costs show sustained moderation, as price stability remains the primary mandate for anchoring expectations.

For investors, the signal is dual-sided. First, despite the clear political will for reform, the persistence of inflation means real yields are compressed, and currency risk remains elevated due to the continuous demand for FX. Second, the structural nature of the food inflation indicates that latent fiscal escalation risk remains high if the government is forced to intervene with large-scale subsidies or direct market stabilization measures.

Portfolio flows are likely to remain volatile until inflation falls below the ~10% psychological threshold. The main risk to the sovereign is that if inflation remains elevated or the currency weakens further, Nigeria’s access to global debt markets may tighten, increasing spreads by 50–70 basis points (bps) and extending maturities.

Looking ahead to mid-2026, the key indicators for sustained investor confidence will be food CPI falling below 15% and nominal NGN yields compressing to <14%. Absent this performance, Nigeria may see its sovereign 10-year yield widen above 17%, and FX reserves could fall below a three-month import cover, potentially triggering a renewed phase of capital flight. The ultimate test of the reform agenda is not accessing the bond market, but tackling the security and logistics failures that prevent the population from feeding itself affordably.