Nigeria’s debt servicing exceeds five key sector budgets by N3.16tn

The welfare cost of debt servicing lies not simply in the payments governments make to creditors, but in the development opportunities that competing public expenditure demands may leave unfunded. In Nigeria, the scale of that trade-off is becoming increasingly difficult to ignore. The Federal Government has allocated N15.8tn to debt servicing in its 2026 budget, approximately N3.16tn more than the combined allocations for agriculture, health, works, defence, and education.

The comparison, contained in an October 2026 assessment by CFG Advisory, highlights the growing weight of debt obligations on public finances. At 23.1 percent of the N68.32tn federal budget, debt servicing takes up almost one-quarter of total government expenditure, making it the single largest spending item in the appropriation.

The five sectors have a combined allocation of approximately N12.64tn: N1.45tn for agriculture and food security, N2.15tn for health, N3.49tn for works, N3.15tn for defence and N2.40tn for education. Individually, their allocations are between 4.5 and 10.9 times smaller than the debt-service provision.

The imbalance extends beyond these sectors. Debt servicing is also larger than the N12.95tn allocated to capital expenditure across the federal government. This means the government has committed more resources to meeting existing debt obligations than to financing its entire capital investment programme.

The comparison does not mean that funds allocated to these sectors have been transferred to creditors. Debt obligations are contractual, while budget allocations reflect competing government priorities. Rather, it illustrates the opportunity cost of servicing accumulated liabilities and the increasingly limited room available for other public expenditure.

The pressure on fiscal space

In public finance, fiscal space refers to the government’s ability to raise and deploy additional resources without undermining its financial stability or ability to meet existing obligations. When debt servicing absorbs a growing proportion of revenue, that space becomes narrower.

The implications extend to the economy’s productive capacity. Greater investment in roads could reduce transport costs and improve access to markets, while healthcare and education spending can strengthen human capital and labour productivity. Agricultural investment can improve food production, storage and distribution.

These investments can generate economic and social returns over time. But when a substantial share of public resources is committed to debt repayments, governments have less flexibility to expand them without increasing revenue, cutting other expenditure or borrowing further.

The distinction between debt servicing and other spending is also important. Debt servicing includes interest payments and principal repayments, while capital expenditure finances the acquisition or construction of assets. Although both are legitimate budgetary obligations, their economic implications differ. Capital investment can create infrastructure that supports future production, whereas debt servicing fulfils obligations arising from previous financing decisions.

CFG Advisory’s assessment also places debt servicing alongside other major expenditure commitments. Recurrent non-debt expenditure is allocated N11.5tn, while statutory transfers receive N4.8tn. The figures show how much of the federal budget is already committed before additional development demands are considered.

The concern is not that debt servicing is inherently unproductive. Nigeria must honour its obligations to maintain access to domestic and international capital markets. The problem arises when the cost of meeting those obligations grows faster than the government’s capacity to generate revenue and finance new investments.

When borrowing becomes a constraint

The composition and purpose of public borrowing are central to determining whether debt strengthens or weakens economic growth. Borrowing to finance infrastructure such as power plants, railways and roads can create productive assets whose benefits extend beyond the repayment period. Such projects can reduce business costs, improve connectivity and expand economic activity, potentially strengthening future government revenue.

Borrowing to meet recurrent obligations presents a different challenge. Salaries and administrative expenditure are necessary for public services, but financing routine obligations through repeated borrowing does not automatically create assets or additional revenue streams. Where new loans are used to meet existing financial commitments, governments risk accumulating further repayment obligations without a corresponding expansion in productive capacity.

The resulting cycle can become self-reinforcing: higher borrowing creates additional interest and principal repayments, which narrow future budgets and increase pressure to borrow again. The risks are compounded by the structure of Nigeria’s debt. Domestic borrowing exposes the government to interest costs in the local financial market, while external borrowing creates foreign-currency obligations. Depreciation of the naira increases the domestic cost of servicing dollar-denominated debt, even when the amount owed in foreign currency remains unchanged.

High government borrowing can also affect private-sector financing. Where government securities offer attractive returns, financial institutions may prefer them to lending to businesses perceived as carrying greater risks. This can raise financing costs for companies seeking to expand production, invest in equipment and create jobs.

The broader concern is that the government may be spending more on servicing existing debt while businesses continue to face high financing costs and infrastructure constraints. That combination can weaken private investment and economic expansion needed to broaden the tax base.

CFG Advisory projects that Nigeria’s external debt could approach $60bn and domestic debt exceed N100tn by the end of 2026. These are projections rather than confirmed year-end figures, but they reinforce concerns about the future cost of public borrowing.

The accountability tests

The fiscal implications become more significant as the Federal Government pursues additional external financing exceeding $21bn. While new borrowing could help address infrastructure deficits and development needs, its justification depends on the economic returns of the projects financed and the government’s ability to meet the resulting obligations.

CFG Advisory has called for an urgent compliance audit of the Fiscal Responsibility Act 2007 and the publication of outstanding budget performance reports to provide a clearer picture of the Federal Government’s fiscal position.

The recommendations point to a fundamental requirement of responsible borrowing: governments must demonstrate how much they earn, how much they spend, what they owe and what they have achieved with borrowed funds.

Budget performance reports are particularly important because approved allocations do not necessarily translate into actual expenditure or completed projects. A government may appropriate funds for a road, hospital or school without releasing the full amount, completing construction or making the facility operational. Without timely reporting, it becomes difficult to determine whether borrowing has generated productive assets or simply increased future repayment obligations.

The government should therefore provide regular information on debt-service payments, outstanding liabilities, new borrowing and capital budget implementation. It should also demonstrate how loans are linked to projects with measurable economic and social benefits.

Ultimately, Nigeria’s debt challenge is not simply about the volume of money owed. It is about the balance between meeting obligations accumulated in the past and financing the investments needed to improve living standards and sustain economic growth.

Debt servicing protects the government’s credibility with creditors, but fiscal credibility must also be supported by the capacity to generate revenue and deliver development. If repayment obligations continue to absorb a growing share of public resources without a corresponding expansion in productive capacity, the cost will extend beyond government accounts to the infrastructure, public services and economic opportunities the country struggles to provide. (BusinessDay)