Nigeria’s projected N20.12 trillion budget deficit for the 2026 fiscal year could severely constrain access to credit for the private sector, analysts have warned.
According to the 2026–2028 Medium-Term Expenditure Framework (MTEF), the federal government plans to finance N14.30 trillion, about 71.1% of the total deficit, through domestic borrowing.
Analysts say this level of borrowing may be technically feasible but could trigger sustained high interest rates, limit credit availability for corporates, and intensify competition for limited liquidity in the financial system.
What they are saying
Financial experts who spoke to Nairametrics expressed concerns about the implications of crowding out organized private sector in Nigeria’s debt market.
“The domestic market can absorb N14.30 trillion, but not without strain,” said Mr. Blakey Ijezie, Founder of Okwudili Ijezie & Co (Chartered Accountants).
“The scale remains unusually large by historical standards. Absorption will occur through higher yields rather than surplus liquidity. This is crowding out risk,” warned Mr. David Adonri, CEO of Highcap Securities.
“Corporations will raise funds at yields that outpace the government’s yield. Debt-funded growth becomes extremely difficult in that environment,” Adonri added.
Analysts agreed that while the capacity exists, the cost implications for private sector financing could be steep. They are more likely to raise capital at a much higher interest rate.
Backstory
The federal government’s reliance on the domestic debt market has grown in recent years, driven by rising fiscal deficits and tighter external borrowing conditions.
Data from the Debt Management Office (DMO) shows domestic borrowing rose from N2.34 trillion in 2021 to N8.58 trillion in 2024, with the 2025 budget marking a turning point.
- In 2023, domestic borrowing spiked to N7.0 trillion before rising again to N8.58 trillion in 2024.
- The 2025 fiscal framework marked a structural shift, placing a heavier emphasis on local funding sources.
- Analysts describe this shift as a move from complementary support to primary reliance on the domestic market.
- Rising debt service costs and reform-driven spending needs are behind the shift.
As Nigeria moves further away from external debt sources, the local market is absorbing more of the burden—raising questions about sustainability.
More Insights
The proposed N14.30 trillion domestic borrowing for 2026 has sparked debate over whether Nigeria’s capital markets can withstand such demand without distorting credit flows.
- Mr. Tilewa Adebajo, CEO of CFG Advisory, noted the market’s “mechanical capacity” to absorb the debt but only at a cost.
- He warned of rising interest rates, limited liquidity, and diminished credit access for businesses.
- Investors may increasingly favour sovereign instruments, crowding out SMEs and private enterprises.
- Analysts estimate corporate borrowing rates could rise to between 25%–30%, especially for riskier firms.
The crowding-out effect may slow growth and restrict private sector participation in economic recovery.
Why this matters
As Nairametrics has reported, heavy government borrowing typically pushes yields higher, tightening financial conditions and raising the risk-free benchmark that all other borrowers must price against.
- Heavy federal government borrowing from the domestic market pushes yields on government securities higher.
- Rising FG yields make commercial papers (CPs) less attractive, unless corporates offer significantly higher interest rates.
- Higher CP yields increase funding pressure on firms, especially those relying on short-term borrowing.
- Government borrowing raises the risk-free benchmark, forcing all other borrowers to price at higher rates.
- Liquidity is increasingly absorbed by FG securities, leaving less funding available for the private sector.
- SMEs are hit hardest, as they must either pay much higher yields or exit the debt market entirely.
- Elevated borrowing costs weaken investment, job creation, and economic growth.
Financing deficits through domestic debt improves fiscal funding in the short term but crowds out private-sector activity, creating long-term growth risks.
What you should know
Nigeria’s move to fund a record N14.30 trillion from the domestic market in 2026 comes amid rising benchmark rates and tight credit conditions.
- The Monetary Policy Rate (MPR) currently stands at 27%, with banks applying additional margins for risk and cost.
- Corporate borrowers with strong credit may negotiate closer to prime lending rates, but smaller firms face even higher costs.
- SEC-approved CPs as of October 2025 stood at N1.37 trillion, with a utilisation rate of 54%.
- Analysts expect issuance activity to stay elevated in 2026 if access to long-term bank credit remains limited.
As interest rates remain high and liquidity tight, Nigeria’s private sector may struggle to secure affordable funding, even as the government soaks up domestic capital to bridge its fiscal gap.
