• Saturday, April 20, 2024
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Implication and prospects of government debt to the Nigerian economy

Nigeria’s economic landscape is witnessing a worrisome trend, marked by a consistent surge in debt servicing over recent fiscal years, indicative of a notable shift in the nation’s financial priorities.

The debt usually arises when a government spends more than it collects in revenue. Governments issue bonds, bills, and notes to finance their budget deficits, and the investors who buy these securities become the holders of the government debt. Thus, the importance of government debt in the economy cannot be overemphasized.

Debt itself is not necessarily bad however, increasing debt levels can reduce per capital income and make society collectively poorer, but government debt plays a crucial role in financing public goods and services, responding to unexpected events, and macroeconomic stabilization by allowing governments to manage the money supply, interest rates, and inflation.

The United States, United Kingdom, Japan, China, and India have significant amounts of national debt, with the US having the largest at over $31.46 trillion. Nigeria is facing economic challenges due to its high levels of government debt, which has led to a stunted GDP growth rate, slowing export growth rate, reduced income per capita, and increasing poverty levels.

Nigeria’s debt-to-GDP ratio has been rising, but with the addition of ways and means, it is currently at 35.2%. The total debt owed by the government is $101.9 million as of 30th September 2022, with $39.6 million being external debt and $62.2 million being domestic debt. The ways and means added $2.9 trillion to the country’s total domestic debt in three months.

Fig: 1.1 Nigeria total outstanding public debt (domestic & external) in billion naira

Nigeria total outstanding public debt (domestic & external) in billion naira

Source: Author computation using data from Central Bank of Nigeria Statistical Bulletin and Debt Management Office (2022).

The Figure 1.1 above showed that the domestic debt of Nigeria has increased, while the external debt has dropped due to a decline in World Bank loans. The rising government debt is caused by increasing budget deficits, which are funded by both domestic and foreign sources, as well as privatization proceeds.

In Q3 of 2022, Nigeria’s debt service costs surged by 28% to N1.17 trillion, indicating that the country spent N1.17 trillion on domestic and external debt servicing, a 27.9% increase compared to N912.7 billion during Q3 of 2021.

Despite Nigeria’s debt relief measures, concerns have been raised about the sustainability of its debt considering the surge in debt service costs and the government’s pledge to offset accumulated arrears. The impact of debt on economic growth remains a contentious issue, even with previous debt relief programs such as the Paris Club Debt relief of 2005.

Nigeria has received debt relief of approximately $6 billion through the Multilateral Debt Relief Initiative (MDRI) program, bought back $1.2 billion of its external debt through the London Club Debt Buyback in 2013, and converted domestic debt into long-term bonds with lower interest rates through the Debt Management Office (DMO) Debt Conversion program in 2008.

Nigeria faces significant debt challenges despite debt relief measures. The government has implemented policies and programs such as the Medium-Term Expenditure Framework (MTEF), Debt Management Office (DMO), Presidential Enabling Business Environment Council (PEBEC), Economic Recovery and Growth Plan (ERGP), Nigeria Sovereign Investment Authority (NSIA), and

Nigerian Debt Relief Fund to manage the country’s debt and ensure responsible borrowing. However, the impact of government debt on economic growth remains contentious as debt levels have continued to rise steadily, under the current administration.

Implications of government debt on the Nigerian economy

In Nigeria, high levels of government debt have contributed to persistent inflation, which has eroded the purchasing power of the country’s citizens. Government debt also impact interest rates, which is the cost of borrowing money. When a government issues bonds, it competes with other borrowers for the available funds, which can drive up interest rates. High interest rates can discourage investment, as it increases the cost of borrowing, which again, slows down the economy.

Additionally, high levels of government debt have contributed to high-interest rates, which have made borrowing more expensive for large businesses in general but households and Micro Small and Medium enterprises (MSME) in particular. Government debt can also affect exchange rates. When debt levels rise it may become less attractive to foreign investors, which can lead to a depreciation in the country’s currency. A weaker currency can make imports more expensive, which can lead to higher inflation.

To be sure, high levels of government debt have contributed to a depreciation in the value of the country’s currency, which has led to higher import prices and input price inflation. Thus, the relationship between government debt and economic growth is complex.

On the one hand, government debt provides the necessary funding for public goods and services, such as infrastructure, education, and healthcare, which can promote economic growth. On the other hand, high levels of government debt crowd out private investment, which slow down economic growth.

Indeed, the Russia/Ukraine war and the Covid-19 pandemic contributed to inflationary pressures in Nigeria, while high levels of government debt negatively impacted economic growth through higher interest rates and inflation that discourage investment and culminate in a decline in economic growth.

Prospects of government debt on the economy of Nigeria

Government debt play a critical role in promoting economic development in Nigeria. By financing public goods and services, such as infrastructure, education, and healthcare, government debt aids in creating the necessary conditions for economic growth. In addition, government debt enables the government to respond to unexpected events, such as economic downturns and natural disasters, which can help to stabilize the economy.

However, it is essential to ensure that the debt is used for productive purposes and that the projects financed are viable and sustainable. High levels of government debt have a negative impact on investment and borrowing in Nigeria. When interest rates are high, businesses and individuals are discouraged from borrowing, which slow down economic growth. In addition, if the debt is managed well and used for productive purposes, it aids in creating the necessary conditions for investment and borrowing.

Government debt is an important source of funding for infrastructural projects in Nigeria. By financing projects such as roads, railways, bridges, and airports, government debt can improve the country’s transportation and communication infrastructure, which leads to economic growth. In addition, by financing energy and water projects, government debt can help to improve the quality of life of the country’s citizens including year-round farming which will support the agriculture sector and reduce the general price of food locally.

Thus, Nigeria’s high level of government debt highlights the importance of managing debt sustainably, which refers to a government’s ability to service its debt without negatively impacting economic growth. This involves maintaining a manageable debt-to-GDP ratio and using the debt for productive purposes rather than financing current consumption.

Strategies for managing government debt in Nigeria

Fiscal policy measures can be used to manage government debt in Nigeria. This involves using fiscal policy tools, such as taxes and government spending, to reduce the budget deficit and limit the accumulation of debt. For example, the government can increase taxes to increase revenue or reduce government spending to decrease expenditures. This help to reduce the budget deficit and limit the accumulation of debt.

In addition, fiscal policy measures can be used to promote economic growth, which help to increase government revenue and reduce the debt-to-GDP ratio. Monetary policy measures can also be used to manage government debt in Nigeria. This involves using monetary policy tools, such as interest rates and money supply, to manage the money market and the economy. For example, the Central Bank of Nigeria can increase interest rates to reduce borrowing and control inflation.

This helps to limit the accumulation of debt and promote debt sustainability. In addition, monetary policy measures can promote economic growth, increase government revenue and reduce the debt-to-GDP ratio, which is crucial for achieving long-term debt sustainability in Nigeria. Strategies to reduce the debt-to-GDP ratio include increasing government revenue, controlling expenditure, and promoting economic growth.

Managing government debt requires balancing debt financing and economic growth, considering factors such as debt sustainability, cost of borrowing, economic growth, and public debt management.

Read also: Managing nigeria’s debt portfolio

Policy recommendation and call for proactive debt management strategies in Nigeria

Given the importance of managing government debt in Nigeria, it is crucial that the government adopts proactive debt management strategies. Some of the measures that can be taken to manage the country’s debt levels include:

Adopting fiscal discipline. Fiscal policies that aim to balance government spending and revenues. This can be achieved through measures such as increasing tax revenues by expanding the tax base, reducing wasteful spending, and improving the efficiency of government programs.

Implementing prudent monetary policy measures that aim to control inflation and manage interest rates. This can be achieved through measures such as controlling the money supply and maintaining a stable exchange rate.

Developing a debt management plan that aims to reduce the debt-to-GDP ratio over time. This can be achieved through measures such as reducing government spending, increasing tax revenues, and attracting foreign investment.

Ensuring that debt is used to finance productive investments that have the potential to generate returns and improve the standard of living for Nigerians.
Increasing transparency and accountability in government debt management and ensuring that the public is informed about the country’s debt levels and management strategies.


Conclusively, government debt has both implications and prospects for the economy of Nigeria. While in my humble opinion not all debt is bad because government debt can help finance essential activities and promote economic growth, however, excessive debt can have negative consequences such as inflation, high interest rates, and exchange rate instability. Therefore, Nigeria must adopt a prudent approach to managing its debt levels, ensuring that it has enough debt to finance critical projects while also ensuring that the debt is sustainable and will not pose a threat to the country’s long-term economic growth.

Note: The views expressed herein are those of the author and not necessarily those of the Development Bank of Nigeria

Prof. Nnanna is chief economist, Development Bank of Nigeria