The Debt Management Office (DMO) has reported a notable increase in Nigeria’s domestic debt stock, which reached N66.957 trillion by mid-2024, marking an 8.74% rise from the N61.578 trillion recorded at the end of the first quarter.

The federal government took on an additional N5.379 trillion in domestic debt in the second quarter through various instruments, including FGN Bonds, Nigerian Treasury Bills (NTBs), FGN Savings Bonds, and Promissory Notes. This follows an even steeper increase in the first quarter of 2024, where domestic debt rose by N8.32 trillion.

The alarming growth of Nigeria’s debt, combined with its heavy debt-servicing obligations, is straining national revenue, with the government saying that around 70% of its income goes to servicing debt.

As of Q1 2024, Nigeria’s domestic debt stood at N61.578 trillion—a significant 15.62% jump from N53.258 trillion at the close of 2023. This indicates a rapid borrowing pace, with the government accumulating N8.32 trillion in new debt within the first three months of 2024 alone. The debt expansion in Q1 outpaced that of Q2, demonstrating an aggressive borrowing pattern during the initial months of the year, partly to cover the fiscal gap and maintain economic momentum amid rising inflation and economic uncertainty.

The rising debt is largely driven by an urgent need to fund a ballooning budget deficit, initially projected at N9.1 trillion—equivalent to approximately 3.8% of Nigeria’s GDP for 2024. However, additional fiscal challenges compelled the government to introduce a supplementary budget of N6.2 trillion, further escalating borrowing needs. Analysts note that this dependence on debt financing to meet short-term obligations exposes the economy to sustainability risks, as borrowing now accounts for the majority of government revenues.

With debt servicing costs surpassing N4 trillion as of the first half of 2024, the government’s fiscal health is strained. This heavy burden also restricts the government’s ability to respond to economic shocks or invest in long-term growth initiatives, creating a cyclical dependence on further borrowing. It’s also significantly limiting resources available for critical infrastructure and social programs.

Key Drivers of Debt Growth

The country’s rising debt load reflects its struggle to manage significant fiscal gaps alongside soaring inflation. The CBN’s stringent monetary policy measures to address inflation, which involves raising the monetary policy rate, have inadvertently increased the cost of government borrowing – although it has made government securities more attractive to investors, leading to higher domestic debt uptake. Additionally, these instruments are perceived as safe, tax-exempt investments, adding to their appeal amidst economic uncertainty.

As of June 2024, Nigeria’s money supply (M3) reached N101.461 trillion, marking a 56.32% year-on-year increase from N64.906 trillion in June 2023, and further expanded to N108.954 trillion by September.

FGN Bonds Dominate The Debt Structure

FGN Bonds remain the predominant instrument within Nigeria’s domestic debt structure, comprising N52.315 trillion or 78.13% of the total domestic debt by June 2024. During the first half of 2024, FGN Bonds accounted for N8.055 trillion out of the N13.699 trillion raised, representing 58.8% of new debt.

Nigerian Treasury Bills (NTBs) represent the second-largest component, with a total debt stock of N11.808 trillion, or 17.64% of the domestic debt. Within the first half of the year, the government raised N5.286 trillion through NTBs, accounting for 38.59% of additional debt incurred. NTBs provide a shorter-term debt solution compared to FGN Bonds, though the reliance on them reflects the government’s ongoing need to address immediate cash flow concerns.

Promissory Notes accounted for N1.671 trillion, or 2.5% of the debt stock, while FGN Savings Bonds represented the smallest share at N55.2 billion, or just 0.08%. Other instruments such as FGN Sukuk and Green Bonds remain in the debt portfolio, with no new Sukuk issues recorded for H1 2024 and Green Bonds still awaiting maturity by 2026.

Domestic Dollar Bond

In Q3 2024, Nigeria introduced a new debt instrument, the ‘domestic dollar bond,’ to increase its funding avenues within the local market. This move is expected to further raise domestic debt levels, though it provides an alternative source of capital. With this addition, Nigeria is attempting to diversify its debt instruments to attract more investors and offer flexibility in managing its debt structure.

However, economists have warned that as the CBN maintains its tight monetary policy stance, the cost of debt servicing will continue to climb, straining public finances further. They noted that the country’s debt trajectory highlights the vulnerability of its fiscal sustainability, as a significant portion of its limited revenue base is dedicated to servicing debt, leaving minimal room for development spending.

While the DMO’s efforts to diversify debt instruments, including introducing bonds denominated in dollars, indicate a short-term strategy to manage the situation, experts have pointed out that sustainable solutions will require broader policy adjustments and fiscal discipline to reduce reliance on debt-financed expenditures.