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Is Nigeria’s growing borrowing a growth strategy or debt trap?
That is the billion dollar question on the lips of analysts as many dissect the ballooning borrowing appetite which is fast becoming a defining feature of the nation’s economic policy.
This has raised fresh concerns as many wonder how what began as a short-term response to fiscal pressure is now turning into a deeper dependence on debt. That shift, experts note, could have implications that stretch well beyond the government’s balance sheet, with wider consequences for growth, credit and the private sector.
According to the Central Bank, credit to the federal government jumped by 75.6 per cent year-on-year (y/y) to N40.38 trillion in May 2026, reflecting increased reliance on domestic debt despite tight monetary conditions.
Of course, the immediate gain is obvious: salaries can be paid, budget gaps can be filled and infrastructure projects can be funded. But the longer-term cost may be a weaker private sector, slower job creation and reduced room for sustainable growth.
Central to the issue is a simple but uncomfortable trade-off. Every naira the government borrows from the domestic financial system is a naira that is less likely to flow into productive private investment.
In an economy where credit is already expensive and scarce, that trade-off matters a great deal. When the state competes aggressively for funds, banks often prefer the relative safety of government securities to the risk of lending to businesses. The result is a financial system that increasingly finances public consumption and refinancing rather than enterprise, expansion, and productivity.
This only means that Nigeria’s borrowing surge is unfolding on two well known fronts; domestic and external.
Domestically, the federal government has leaned heavily on treasury bills and other short-term instruments to plug funding gaps. Specifically, between January and May alone, the government issued N11.4 trillion in treasury bills, the highest amount ever recorded in a five-month period.
According to FMDQ data, outstanding treasury bills totalled approximately N17.4 trillion, underscoring the Federal Government’s growing reliance on domestic debt markets to finance its fiscal obligations.
This strategy has been effective in raising cash quickly, but it has also pushed up the government’s share of available liquidity in the banking system.
Also, as more money is absorbed by sovereign borrowing, fewer funds remain available for manufacturers, traders, agribusinesses, and small firms that need credit to expand operations. That is the classic crowding-out effect, and in Nigeria it is becoming harder to ignore.
The external side of the borrowing strategy presents a different but equally important challenge. A proposed $5 billion bond swap transaction is nearing completion, following the securing of a $1 billion facility from Citibank UK to finance the modernisation of the Apapa and Tin Can Island ports.
In addition, a $516 million loan for the Badagry-Sokoto superhighway is also under consideration. Based on the current pipeline of transactions, Nigeria appears to be on course to contract as much as $10 billion in new external debt in 2026 alone, with much of the borrowing expected to come at commercial rather than concessional rates. Furthermore, there have been reports that Nigeria is preparing to tap into international markets again through Eurobonds and other commercial borrowings, even as it also pursues bilateral and project-linked loans.
The Debt Management Office (DMO) have revealed that it is seeking advisers for a planned Eurobond issuance under the 2026 external borrowing programme. The proposed bond, the debt office said, will help finance the budget, refinance existing debt and support infrastructure, subject to market conditions and investor demand.
Foreign borrowing can ease pressure on the domestic market and provide foreign exchange needed for major projects, but it also comes with currency risk and higher repayment uncertainty. If borrowed dollars are used for projects that do not generate strong dollar earnings, the burden eventually falls back on the public finances and the exchange rate.
Recently, Daily Sun reported that the World Bank approved a $1.25 billion Development Policy Financing (DPF) loan for Nigeria to support economic reforms aimed at accelerating private sector-led growth, creating jobs and strengthening the country’s business environment.
This is equivalent of N2.1 trillion at an exchange rate of N1,400/$1. Again, it will be safe to state that the fundamental concern is not borrowing itself, but what the borrowing is doing to the structure of the economy.
Debt can be useful when it is used to finance productive investment that expands capacity, improves infrastructure, and raises future revenues. In such cases, borrowing can support growth rather than undermine it. But when debt is used mainly to finance recurrent expenditure, refinance old obligations, or bridge short-term fiscal gaps without a corresponding expansion in output, it becomes a drag on the economy. That is the risk Nigeria now faces.
In a document titled; Nigeria’s Fiscal Balancing Act: Domestic debt meets Eurobond by SBM Intelligence, it explained that one reason the current borrowing pattern is worrying is that it comes at a time when the cost of capital is already high.
According to the geopolitical, research and consulting based firm, interest rates remain elevated, inflation is still painful, and businesses are operating in a difficult environment marked by weak purchasing power and fragile demand.
It said, “Although Nigeria’s debt-to-GDP ratio remains below the commonly accepted threshold for developing economies, standing at roughly 36 per cent, the pace and composition of new borrowing are prompting renewed debate over the country’s long-term fiscal sustainability.
The concern extends beyond the headline debt ratio to the structure and cost of the obligations being accumulated. The experience of the Paris Club debt overhang, which constrained Nigeria’s public finances for decades before eventual debt relief, remains a cautionary reminder of how persistent debt burdens can limit fiscal flexibility and economic development”.
Under such conditions, the private sector needs easier access to affordable credit, not less. Yet government borrowing competes directly with business borrowing for the same pool of financial resources. Because sovereign debt is generally perceived as safer, lenders often shift toward it, leaving productive firms underserved.
This creates a second-order effect on growth. When businesses cannot borrow affordably, they scale back expansion plans, delay hiring, reduce inventory accumulation, and postpone investment in machinery and technology. That slows productivity growth, weakens employment creation, and limits the economy’s ability to diversify.
Equally important is the question of debt affordability, particularly when measured against government revenues. While the Tinubu administration is betting on a broader revenue base through its tax reforms and an expanded tax net to improve fiscal receipts, concerns remain over whether revenue growth can consistently keep pace with rising debt service obligations.
Perhaps the most immediate economic consequence of this borrowing strategy is its effect on private sector credit. As government borrowing accelerates, banks have increasingly shifted their balance sheets toward lending to the sovereign at the expense of businesses.
High-yield, short-term government securities now offer attractive and relatively risk-free returns, with three-month and six-month Treasury bills yielding around 16 per cent. This has created a powerful incentive for financial institutions to channel liquidity into government instruments rather than extend credit to manufacturers, small businesses, and other productive sectors of the economy.
However, in a country like Nigeria, where non-oil growth is essential for resilience, such constraints are especially damaging. A vibrant private sector is not a luxury; it is the engine of broad-based growth.
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The impact is particularly severe for small and medium-sized enterprises. These businesses typically have less collateral, thinner margins, and greater sensitivity to borrowing costs. They are also the most important source of employment in many parts of the economy.
However, instead of financing productive investment, a growing share of banking sector liquidity is being absorbed by government borrowing, reducing access to affordable credit for the private sector.
When credit tightens, SMEs are usually the first to suffer. They may not only postpone expansion but also struggle to survive day-to-day.
Over time, this weakens entrepreneurship, limits innovation, and reduces the economy’s capacity to absorb labour. The damage is cumulative.
There is also a psychological dimension to the borrowing surge. When government borrowing becomes a routine fiscal habit, it can send a signal that difficult revenue reforms are being postponed. Instead of strengthening tax collection, improving spending efficiency, and broadening the revenue base, then policymakers may be tempted to rely on debt as the easier option.
Yes, that may buy time in the short run, but it risks creating a cycle in which borrowing finances borrowing. In such a scenario, the state becomes increasingly dependent on debt markets just to sustain basic operations.
Experts’ react
Founder, Cowry Asset Management Limited, Johnson Chukwu, during a virtual forum, stressed that Nigeria’s debt burden needs to be viewed in the context of revenue weakness.
Chukwu explained that a country can carry a relatively moderate debt-to-GDP ratio and still be in distress if its revenues are too weak to service obligations comfortably.
“That is why investors and analysts often focus less on headline debt size and more on debt service relative to government income. Nigeria’s fiscal problem is not simply that it owes money; it is that it may not be earning enough to service that debt without squeezing out development spending.
That leaves limited fiscal room for health, education, infrastructure, and social protection or insecurity concerns”, he said.
Chukwu added that the risk to economic expansion is therefore not abstract. “It is visible in the mismatch between rising public debt and sluggish private-sector performance. If borrowing continues to rise while growth remains subdued, the economy can get trapped in a low-growth, high-debt pattern. In that environment, debt service consumes more revenue, borrowing becomes more expensive, and fiscal space narrows further.
Investors begin to demand higher risk premiums, businesses face more uncertainty, and the state has less capacity to respond to shocks. The result is a more fragile macroeconomic outlook”, he stressed.
Also speaking, the National Coordinator, Progressive Shareholders Association of Nigeria, Boniface Okezie, noted that the stakes are even higher because the economy is already dealing with structural weaknesses.
According to him, power shortages, poor logistics, exchange-rate instability, inflationary pressures, and weak industrial capacity all reduce the return on borrowing.
“Debt cannot fix those problems by itself. In fact, if borrowed funds are not channeled into reforms that unlock productivity, the borrowing may simply paper over deeper structural issues. That is why the quality of spending matters as much as the quantity of debt. Borrowing for consumption is very different from borrowing for transformation”, Okezie stated.
He added that Nigeria does need capital for infrastructure, transport, energy, and public services. His words, “A growing economy requires roads, ports, power systems, and digital infrastructure. The problem is not that government borrows, but that it must borrow prudently and strategically. Debt should support growth, not merely postpone adjustment. So the test is whether each round of borrowing produces a future stream of economic returns that outweighs the cost of repayment.
nue mobilisation, and disciplined project execution? If they can, then borrowing may remain manageable. But if borrowing keeps rising without a visible improvement in output, exports, or fiscal efficiency, investor confidence erodes.
The domestic bond market may still absorb government paper for a while, but at a growing cost to the broader economy. External investors, too, may become more cautious if they see a policy mix that depends too heavily on debt without strong growth support”.
With manufacturers increasingly scaling back inventory accumulation and delaying expansion plans owing to high borrowing costs, these trends point to an economy where public sector financing needs are increasingly competing with and potentially undermining the private sector’s capacity to drive investment, productivity, employment, and long-term economic growth.
The outlook for Nigeria’s economic expansion therefore depends on whether debt is used as a bridge or as a crutch.
If it is a bridge, it can help finance reforms and infrastructure that raise productivity. If it is a crutch, it may allow underlying weaknesses to persist while making them more expensive to fix later. At present, the balance appears uneasy. The government’s borrowing surge may keep fiscal operations afloat, but it risks suppressing the very private-sector dynamism needed to generate durable growth.
Hence, the central challenge is to break the cycle in which public borrowing dominates the financial system. That means increasing non-oil revenue, improving tax administration, reducing wasteful spending, and directing borrowing toward projects with clear economic returns.
It also means creating conditions that allow banks to lend more confidently to businesses. Without that shift, the country may continue to finance its present by mortgaging its future.
Conclusion
The country’s borrowing surge is not just a fiscal story. It is a growth story, a credit story, and a confidence story. The issue is not whether the government can keep borrowing, but whether the economy can keep absorbing that borrowing without losing momentum.
Right now, the warning signs are visible. If public debt continues to expand faster than productive capacity, economic expansion will likely remain constrained, uneven, and vulnerable.
Nigeria still has the opportunity to turn debt into development. But that will require discipline, not just access to lenders. It will require reform, not just refinancing and it will require a clear decision that borrowing should serve growth, rather than crowd it out.
