NIGERIA will face a worsening debt burden in the coming year as the Federal Government has projected a rise in the debt-to-GDP (gross domestic product) ratio to 60 per cent by 2027.
The country currently has a debt-to-GDP ratio of 52.25 per cent as of December 2024, now expected to rise by 7.75 per cent.
Economic watchers say this would amount to higher inflationary pressure and create more currency problems for Nigeria, which could see Nigeria pay higher cost to service borrowed funds and trapped in debt.
With the debt surge, there are also growing fears of sovereign default, the possibility that Nigeria might struggle to meet its debt obligations.
Nigeria’s fiscal position has deteriorated significantly over the past decade, with public debt rising, driven largely by currency devaluation and persistent fiscal deficits.
“FGN’s public debt has continued to skyrocket. In just two years of this administration, the debt has doubled what the previous administration accumulated in eight years,” says Adonri,”Vice Chairman at Highcap Securities, David Adonri, said.
“While the naira-denominated debt may be covered with Ways and Means (central bank financing) at the risk of hyperinflation, escalating foreign debt must be extinguished with hard currency, which may not be available when needed. That is the real threat; a sovereign default could occur if this pace of foreign borrowing continues unchecked. We are already in a debt trap, borrowing new funds to pay old debts. If the federal government doesn’t de-leverage soon, insolvency could be imminent.”
A debt-to-GDP ratio is used to measure a country’s debt as a percentage of its GDP, which indicates its ability to repay its debt.
While a low ratio suggests a stronger economy and greater capacity to meet debt obligations, a high ratio signifies a heavier debt burden and potential repayment difficulties.
In a recent disclosure, the Debt Management Office (DMO) said that Nigeria’s debt-to-GDP ratio will rise to 60 per cent by 2027.
It disclosed this in the recently approved Medium-Term Debt Management Strategy (MTDS) for the 2024-2027 fiscal year, dated August 22.
It said the approved MTDS would ensure debt sustainability while meeting the country’s financing needs.
The MTDS, developed with technical support from the World Bank and the International Monetary Fund (IMF), is a globally recognised tool for managing public debt.
The framework aims to balance borrowing costs with associated risks, deepen the domestic securities market, and optimise the composition of Nigeria’s debt portfolio.
“The key objectives of the MTDS are to meet the Government’s financing needs and payment obligations in the short to medium term, taking into consideration the costs and risks trade-offs in the debt portfolio.
“To achieve optimum composition of the public debt portfolio that ensures debt sustainability; and to further deepen the domestic securities market through the introduction of new products,” the DMO stated.
It explained that the preparation of the MTDS usually involves the consideration of alternative funding strategies available to the government, as it seeks to meet its financing needs, taking into consideration the cost of borrowing and the associated risks, while ensuring debt sustainability in the medium to long-term.
It stressed that nominal debt as a percentage of GDP is expected to be capped at 60 per cent by 2027, compared to 52.25 per cent as at end-December 2024.
Other projections in the framework included that interest payments will not exceed 4.5 per cent of GDP compared to 3.75 per cent in 2024, while sovereign guarantees are to remain below 5 per cent of GDP, up from the 2.09 per cent
It revised domestic to external to “55:45, compared to 48:52 previously, while maintaining domestic borrowing at least 75 per cent long-term instruments against a maximum of 25 per cent short-term.
Refinancing risk is to be contained, with debt maturing in one year not to exceed 15 per cent of the total portfolio
The DMO stated further that the foreign exchange (FX) debt will be capped at 45 per cent of the entire debt stock.
It noted Nigeria’s average debt maturity of 11.05 years and average time to refixing of 10.74 years already exceeded the minimum thresholds of 10 years set in the strategy.
Nigeria’s total public debt burden has risen to N149.39 trillion as of the first quarter of this year, The ICIR reported.
It rose by N27.72 trillion year-on-year from N121.67 trillion as of the first quarter of 2024.
It is likely to rise higher in the second quarter of this year by the time the DMO releases its next report as the National Assembly had approved new foreign loans worth $24.14 billion requested by President Bola Tinubu.
Harrison Edeh is a journalist with the International Centre for Investigative Reporting, always determined to drive advocacy for good governance through holding public officials and businesses accountable.