Economists Warn Of Unsustainable Debt As FG’s Domestic Borrowing Hits N24.7trn

Economists have warned that Nigeria’s rising debt burden could become unsustainable as the federal government’s domestic bond borrowing surged by 90 per cent to N24.7 trillion in the first eight months of 2026, raising concerns over mounting debt-service obligations and reduced access to funds for businesses.

The warning came as the latest data from the Central Bank of Nigeria (CBN) showed that credit to the private sector increased by N2.39 trillion between May and July, rising from N81.04 trillion in May to N83.43 trillion in July.

Although bank lending to businesses and households continued to expand, the pace of growth slowed sharply in July. Private-sector credit rose by just N171.80 billion during the month, compared with an increase of N2.22 trillion in June.

Analysts said the slower growth in private-sector credit, alongside increased government borrowing, could heighten competition for funds in the domestic financial market, particularly if the federal government continues to rely heavily on local debt to finance its expanding expenditure.

With government borrowing competing with businesses for bank funds and other domestic sources of financing, economists warned that banks could increasingly favour government securities, which are generally considered lower-risk assets, over loans to private-sector operators.

The development could result in tighter credit conditions and higher borrowing costs for businesses, particularly if the government maintains its heavy reliance on domestic borrowing.

The CBN data, however, showed that net domestic credit fell by N5.94 trillion, or 4.82 per cent, to N117.35 trillion in July from N123.29 trillion in June.

The decline was largely driven by a N6.11 trillion reduction in credit to government, which fell from N40.03 trillion to N33.92 trillion during the month.

However, the month-on-month decline in credit to government does not contradict the broader increase in the federal government’s domestic borrowing position, as the N24.7 trillion figure reflects borrowing largely through domestic bond issuance.

Analysts said the contrasting figures highlight the financing pressures facing the Nigerian economy, with the government increasing its reliance on domestic debt even as the private sector requires greater access to credit to support investment, production and expansion.

Professor of Law and developmental economist, Prof. Tayo Bello, said the sustainability of Nigeria’s rising debt burden would ultimately depend on the government’s ability to strengthen its revenue base.

Bello, who put Nigeria’s domestic debt at about N80.5 trillion, said the country currently services the debt with about N3.14 trillion annually.

“Sustainability means looking at the quantum of debt that we have so far and asking whether we will be able to pay it. As I said earlier, there is no debt Nigeria cannot pay, both domestic and foreign debt. It is just a matter of the will and policy,” he said.

According to him, borrowing could be preferable to printing money to finance government expenditure, particularly as excessive money creation could worsen inflation.

“When you have debt that the economy can sustain, it is better for the government or any nation than resorting to domestic printing of money. We have been talking about inflation. If we had resorted to printing naira or any other currency, it would have been worse than that,” Bello said.

He, however, warned that weak government revenue could make debt obligations increasingly difficult to sustain.

“Nigeria’s domestic debt, or debt generally, is tied to revenue. Once something is tied to revenue, it means it will be difficult, both in the short run and the long run, to be sustainable. Any time there is a shortfall in the revenue base, it will affect debt obligations,” he said.

Bello said government borrowing would be less problematic if the funds were channelled into productive projects capable of generating returns sufficient to service and repay the loans.

“Assuming all those debts were tied to projects that are paying or generating high returns, there would not be any problem. For example, if you have a project and the proceeds from that project are being used to service and repay the debt, there would not be any problem,” he said.

He called for greater fiscal discipline, warning that mounting debt-service obligations could create pressure across the wider economy.

“Debt obligations can be welcome or commendable once you exercise restraint in continuous borrowing. When you are servicing debt with a huge amount of money, it creates a problem for both the micro and macro economy,” Bello said.

Also speaking, Head of Financial Institutions Ratings at Agusto & Co., Ayokunle Olubunmi, attributed the increase in government borrowing largely to the rapid expansion of the national budget without a corresponding increase in government revenue.

“To be fair to the Federal Government, they are not doing things out of the wind. They have already informed us because we always say that the budget is a plan on how they want to manage government expenses for the year,” Olubunmi said.

He said the size of the national budget had expanded significantly in recent years, while revenue had failed to grow at a similar pace.

“Over the last couple of years, if we check the size of the budget, it has ballooned significantly. Given that revenue cannot go in tandem with the size of the expenses, that will result in increased borrowings,” he said.

Olubunmi stressed that the major concern was not borrowing itself but how the borrowed funds were deployed.

“The problem is not about borrowing. The question is: what are you using it for? How efficient and effective is what you are spending it on? Can it generate enough return, either directly or indirectly?” he said.

He expressed concern that some borrowings incurred over the years had not been used effectively, with some projects cited to justify the loans failing to achieve their intended objectives.

“Unfortunately, if you look at what is happening in Nigeria, a lot of the borrowings that we’ve seen over the years have not been used effectively. Some of the projects they claim they will spend the money on have not been executed effectively,” Olubunmi said.

He noted that Sukuk financing could provide greater transparency because the projects for which funds are raised are identified from the outset, making it easier to monitor how the money is deployed.

Olubunmi also warned that Nigerians would ultimately bear the cost of government borrowing because the loans must be repaid regardless of whether the projects financed generate the expected returns.

“Whether we like it or not, these borrowings must be repaid, and whether we like it or not, we are the ones that will pay for it,” he said.

He urged policymakers to pay closer attention to debt-sustainability indicators, citing Ghana’s experience as a warning against allowing debt pressures to escalate.

“But remember also that there are debt sustainability metrics. Even if you approach it internally, there are international guidelines. We actually look at what happened to Ghana. Ghana was on this path until they didn’t have a choice; they had to restructure, and that’s why they had the domestic debt exchange programme,” he said.

Despite the increase in government borrowing, the latest figures indicate that banks have continued to extend credit to the private sector, with total private-sector credit reaching N83.43 trillion in July.

However, analysts cautioned that continued expansion of government borrowing could put increasing pressure on domestic liquidity and eventually make credit more expensive or less accessible to businesses.

For the private sector, the key risk is that stronger government demand for domestic funds could gradually shift banks’ lending preference towards sovereign instruments at the expense of productive-sector financing.

The sustainability of the current credit expansion will therefore depend on the government’s ability to strengthen revenue generation, moderate its reliance on domestic borrowing and ensure that borrowed funds are invested in productive activities capable of generating sufficient economic returns.