Nigeria’s debt crisis has reached a new high as the Federal Government (FG) and states struggle with mounting fiscal pressures driven largely by an unprecedented devaluation of the naira. Recent figures released at the World Bank/International Monetary Fund (IMF) annual meetings reveal that Nigeria’s public debt surged to N134.3 trillion ($91.3 billion) by Q2 2024. This eye-watering 10.35% leap in just three months underscores the country’s continued fiscal instability and heavy reliance on debt financing to bridge deficits, raising questions about the sustainability of Nigeria’s economic model amid global investor skepticism.
While the debt amount in dollars appeared stagnant, reflecting a mere $200 million decrease, the naira’s devaluation tells a different story. This report delves into the intricacies of Nigeria’s rising debt, dissecting the local and international implications, investor sentiment, and the government’s debt strategy that increasingly defies the IMF’s advice. Is Nigeria walking a fiscal tightrope, or does the government have a viable plan to steer the economy back on course?
The Naira Devaluation and Its Compounding Effect on Debt
At the heart of this debt crisis lies the dramatic devaluation of the naira. In Q2 2024, the naira’s fall pushed the nation’s debt up by N12.6 trillion, highlighting the stark vulnerabilities of an economy over-dependent on imported goods and foreign-denominated debt. Nigeria’s total debt has soared as the exchange rate for the naira plummeted, fuelling a cycle of ever-growing liabilities. The report presented during the IMF and World Bank meetings confirmed the government’s struggle to contain domestic debt, which rose by a staggering N5.55 trillion, reaching N71.2 trillion by the end of Q2.
For the average Nigerian, this steep rise in debt translates into higher costs of living, as the country relies on imports for essential goods. The cost of borrowing domestically has also surged, pressuring local businesses, hindering infrastructure development, and casting a shadow over Nigeria’s prospects for economic growth. The government’s reliance on debt-driven financing may indicate a lack of effective revenue-generating policies, deepening concerns over Nigeria’s economic future.
Debt Structure: A Heavy Reliance on Domestic Instruments
Nigeria’s debt portfolio remains dominated by domestic debt, accounting for 53% of the total debt stock, amounting to N71.2 trillion ($48.4 billion). The FG has increasingly leaned on local debt instruments, including FGN Bonds, which represent 78% of the domestic debt, further highlighting the government’s growing dependency on local bond markets. Treasury Bills, Sukuk, Promissory Notes, and Green Bonds add to this mix, painting a picture of a highly diversified yet burdensome debt portfolio that relies extensively on domestic resources.
This strategy reflects both a necessity and a compulsion, as access to foreign financing becomes costlier amid a volatile global market and Nigeria’s rising risk premium. The dependence on local borrowing suggests that the government may be trying to minimise exchange rate risks associated with foreign debt. However, this strategy also means that the government is locking up significant resources that could otherwise be channeled into essential services, like healthcare and education. Moreover, the government’s reliance on domestic debt instruments is increasingly squeezing out private investment, stifling economic growth.
External Debt Profile: Multilateral Dependence and Growing Skepticism
While domestic debt has taken centre stage, Nigeria’s external debt remains a significant burden. The country’s foreign debt rose marginally by $780 million in Q2 2024, bringing the total to $42.9 billion, or 47% of the national debt. A majority, 50.4%, of this external debt is sourced from multilateral institutions, with the World Bank and African Development Bank as the leading creditors.
However, international institutions have expressed growing concerns over Nigeria’s debt sustainability. The IMF, in particular, advised Nigeria against issuing dollar-denominated domestic bonds, citing the strain it could place on an already fragile economy. Despite this, the FG defied the IMF’s recommendations and proceeded with a domestic dollar bond issuance, which was reportedly oversubscribed by 100%, raising over $900 million against an initial target of $500 million. While the oversubscription reflects investor confidence, it also raises concerns about the potential fallout from taking on more dollar-denominated debt.
Defying IMF Advice: A Risky Debt Strategy?
The FG’s decision to go ahead with the dollar-denominated bond despite IMF caution reveals a calculated risk by Finance Minister Wale Edun, who underscored Nigeria’s prerogative to “consider IMF guidance but not be bound by it.” The minister argued that the bond’s oversubscription underscores investor interest and reflects confidence in Nigeria’s economic potential. However, the decision to issue the bond domestically indicates the FG’s struggle to secure favourable terms in international markets, given Nigeria’s high-risk rating.
While Edun’s defiance highlights a shift towards a more independent economic stance, the government’s disregard for IMF’s recommendations may come at a steep cost. Should Nigeria face any financial shocks—be it from further naira devaluation, global market volatility, or rising interest rates—the repayment of dollar-denominated bonds could become increasingly onerous, amplifying the country’s financial vulnerabilities.
Debt-to-GDP Ratio Exceeds 50%: An Alarming Red Flag
One of the most troubling revelations in the report is Nigeria’s debt-to-GDP ratio, which has now exceeded 50%. This figure not only breaches Nigeria’s own fiscal policy thresholds but also places the country in a precarious position with respect to international debt standards. While some developed economies sustain higher debt-to-GDP ratios, Nigeria’s situation is complicated by its weak revenue base, high inflation, and limited economic diversification.
For an economy heavily dependent on oil exports, which themselves are subject to global price fluctuations, surpassing a 50% debt-to-GDP ratio raises serious red flags about the sustainability of the nation’s fiscal policies. This ratio, combined with persistent budget deficits and low revenue generation, paints a grim picture, leaving little room for the government to manoeuvre without resorting to further borrowing. Analysts warn that Nigeria’s economic resilience could erode rapidly should another global economic downturn occur, calling into question the government’s ability to maintain its current debt trajectory without risking default.
The IMF and World Bank Role: Lending Support or Imposing Constraints?
While the IMF and World Bank continue to provide concessional loans and funding to Nigeria, their influence extends beyond financial assistance to shaping the country’s economic policies. This dynamic raises a complex debate about the benefits versus the constraints imposed by multilateral institutions. Minister Edun acknowledged the IMF’s crucial role in stabilising economies, yet he stressed that Nigeria’s economic strategy must ultimately serve its national interests. This sentiment underscores a broader criticism among developing nations who feel constrained by IMF-imposed austerity measures.
The tension between Nigeria and the IMF highlights a dilemma faced by many emerging economies: balancing the need for foreign support with the desire for economic sovereignty. However, as Nigeria increasingly turns to multilateral loans, its leverage to act independently diminishes. The reliance on organisations such as the IMF and the World Bank, though financially beneficial, is often accompanied by policy restrictions that some argue hinder national development goals. This relationship may become even more complicated if Nigeria’s debt continues to spiral, potentially leading to more stringent oversight by these institutions.
Investor Sentiment: Confidence or Caution?
The recent oversubscription of Nigeria’s dollar-denominated bond could be seen as a sign of investor confidence in the country’s potential. However, some investors view it as a speculative bet on high returns rather than genuine optimism about Nigeria’s economic trajectory. Nigeria’s domestic and foreign investors are acutely aware of the risks associated with the country’s fiscal policies, currency instability, and political climate, especially as the government resists IMF guidance and adopts a high-debt strategy.
As Nigeria’s debt levels soar, driven by the plummeting naira and government borrowing, the future of the country’s economy hangs in the balance. The FG’s decision to defy IMF advice and persist with its high-debt strategy has polarised opinions, raising concerns among financial analysts and policymakers alike. While the government remains optimistic that local and foreign investors will continue to support its borrowing agenda, the stark reality of Nigeria’s debt burden cannot be ignored.