Nigeria’s debt servicing trap

NIGERIA’S public debt has become a fiscal trap. The government now spends more on interest than it collects in revenue, while the investments needed to raise future income are treated as expendable. The Federal Government’s first-half 2026 results, reported in the World Bank’s October Nigeria Development Update, expose this crisis of priorities with unusual clarity.

Between January and June 2026, the Federal Government collected N6.2 trillion in revenue but spent N7.7 trillion on debt interest alone.

Interest payments therefore consumed 124.2 per cent of revenue, exceeding total receipts by N1.5 trillion. The interest bill rose by 37.5 per cent from N5.6 trillion in the first half of 2025, even as revenue increased by 72.2 per cent from N3.6 trillion to N6.2 trillion.

The revenue improvement is welcome, but it has not restored fiscal health. The interest-to-revenue ratio fell from about 155.6 per cent to 124.2 per cent, yet the government still could not pay interest from its own income, let alone fund development adequately.

Borrowing costs are swallowing more revenue rather than turning it into public investment.

On Sunday, the Minister of Finance Taiwo Oyedele said the World Bank presented an incomplete picture of debt servicing, arguing that it excludes some government revenue and combined debt obligations across government tiers.

Nigeria cannot indefinitely borrow to pay for previous borrowing while neglecting the electricity, transport, education, health and productive infrastructure that could generate future revenue.

Federal Government spending rose from N4.6 trillion in the first half of 2025 to N16.1 trillion in the same period of 2026. Personnel expenditure increased from N3.7 trillion to N4.2 trillion, partly reflecting wage adjustments.

Interest and personnel costs together reached N11.9 trillion or 73.9 per cent of total federal expenditure and nearly twice the revenue collected.

Capital expenditure, by contrast, collapsed from one per cent of GDP in the first half of 2025 to 0.3 per cent in the corresponding period of 2026, amounting to roughly N700 billion.

The Federal Government therefore spent about 11 times more on interest payments than on reported capital projects.

This is not fiscal adjustment; it is fiscal inversion. Debt service and recurrent commitments are treated as sacrosanct, while infrastructure and development spending become the residual items.

The government may meet immediate obligations, but the economy pays through weaker productivity, fewer jobs and lower future revenue.

The World Bank noted that the federal deficit narrowed from N11 trillion in the first half of 2025 to N9.9 trillion in the first half of 2026, but partly because capital spending was subdued. A government cannot credibly claim progress merely because it spent less on building the country.

The IMF estimates suggest the country requires sustained investment of about $100 billion annually for 30 years in electricity, transport, water, housing, digital infrastructure and other productive assets. A federal capital outturn of N700 billion in six months is grossly inadequate for that task.

The Central Bank of Nigeria’s tight monetary policy adds another contradiction. High policy rates may be justified to contain entrenched inflation and support the naira, but they raise yields on Treasury bills and government bonds.

Investors demand attractive returns to lend to a sovereign facing inflation and currency risks, and those costs flow directly into the budget.

The World Bank’s assessment indicates that domestic obligations made up 57.9 per cent of Nigeria’s public debt stock in 2025 but accounted for 72.6 per cent of interest payments.

This creates a self-defeating cycle. Monetary authorities tighten conditions to fight inflation, while fiscal authorities pay increasingly high rates to finance deficits.

Government borrowing competes with manufacturers, farmers, construction firms, small businesses and households for scarce credit. Banks and investors can earn comparatively safe returns from government securities, reducing lending to productive enterprises.

The result is weaker investment, constrained productive capacity, persistent supply shortages and continued inflationary pressure. The government then borrows more at high rates, increasing interest costs and further squeezing the capital expenditure needed to remove the bottlenecks that make Nigerian production expensive.

The 2026 budget makes the contradiction impossible to ignore. The approved expenditure of N68.32 trillion against projected revenue of N36.87 trillion leaves a deficit of about N31.45 trillion.

Nearly half the budget must therefore be financed through borrowing and other financing arrangements.

Debt servicing alone is budgeted at about N15.8 trillion. BudgIT has tagged the budget ambitious but unviable, warning that optimistic revenue assumptions and mounting debt obligations threaten implementation.

Indeed, the government is committing future income before it has been earned. If revenue underperforms, it must borrow more, accumulate arrears, defer projects or cut other spending. Repeated reliance on all four options is a recipe for fiscal paralysis.

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The distinction between debt sustainability and fiscal liquidity is crucial. The IMF projects federal interest payments at 53.7 per cent of federal revenue for 2026.

That annual projection is not directly comparable with the World Bank’s first-half outturn of 124.2 per cent, which reflects an especially severe six-month imbalance. But both point to the same structural weakness: Nigeria’s revenue base is too small for the obligations it must finance.

A debt-to-GDP ratio of 35.5 per cent looks manageable, but it can conceal severe distress when tax collection is weak, and interest payments absorb an excessive share of receipts.

The World Bank estimated public debt at about N166.7 trillion in H2 2026, compared with N67 trillion in 2021. Debt management must therefore consider not only how much Nigeria borrows, but the currency, price, maturity and productive purpose of every loan.

Nigeria therefore needs a comprehensive fiscal reset that de-emphasises the lazy default to borrowing in addressing revenue shortfalls.

First, revenue mobilisation must become a national priority. Government should widen the tax base through better compliance, digital collection, reduced leakages and removal of unjustified exemptions.

It should bring more profitable activity into the tax net without punishing low-income households and small businesses.

Oil revenue must improve through higher production, reduced theft, reliable infrastructure and transparent remittances.

Second, the debt portfolio needs urgent restructuring. The Finance Ministry and Debt Management Office should extend maturities where sensible, reduce reliance on short-term instruments and replace expensive commercial borrowing with cheaper concessional financing where available.

A voluntary exchange of high-coupon domestic securities for longer-dated instruments could ease near-term refinancing pressure, but only if terms are credible and fair. Transparent debt management and a credible medium-term fiscal plan are indispensable.

Third, monetary policy must become more sensitive to the damage caused by persistently high rates. The CBN should retain independence and reduce rates as inflation expectations, exchange-rate conditions and underlying price pressures permit.

Fourth, expenditure must be reprioritised. The government should audit major projects, eliminate duplication, curb wasteful overheads and publish regular reports on budget execution, contractor arrears and project completion. Capital spending should be protected where projects offer clear economic and social returns.

Public-private partnerships can mobilise finance for viable infrastructure, provided contracts are transparent, contingent liabilities are disclosed, and public interests are protected. Here, the government should fast-track its divestment programme from state-owned enterprises.

An NNPC IPO, offloading Ajaokuta Steel and other entities better led by private sector players, will free up funds, inject management expertise and ensure actual returns.

Fifth, Nigeria must stop borrowing for recurrent consumption without a credible plan to expand future revenue.

Debt is not inherently irresponsible. Borrowing for reliable power, transport corridors, irrigation and productive infrastructure can generate returns. Borrowing repeatedly for routine spending and accumulated interest, without improving productive capacity, transfers today’s failures to tomorrow’s taxpayers.

Finally, the government must restore budget credibility. Revenue projections should be realistic, supplementary appropriations tightly controlled, and implementation reports published promptly.

The National Assembly must scrutinise borrowing plans and execution rather than treating approval as a routine necessity. Citizens should be able to trace borrowed money to completed assets and measurable service improvements.

The government must cut its overheads and the bloated cost of running too many MDAs. States should be encouraged to develop and monetise resources to drive investment and development projects.

Nigeria’s development ambitions are well documented, but it lacks the fiscal room and institutional discipline to finance them consistently. The World Bank’s warning that improved fiscal balances partly reflect depressed capital expenditure should be a wake-up call, not an excuse for self-congratulation.

A country cannot build prosperity by continually postponing the roads, schools, hospitals and power infrastructure that prosperity requires.

Nor can it sustain public confidence when creditors are paid first, government machinery consumes much of what remains, and development projects survive on whatever is left.

The Tinubu administration must recognise that fiscal stability is not the ability to pay creditors on schedule. It is also the ability to pay workers fairly, educate children, protect public health, provide security and build infrastructure that makes businesses competitive.

These are not optional extras to be funded after creditors have been satisfied; they are the central obligations of any government.