Inflation, high interest rates loom as FG credit hits N40.38tn

Fresh data released by the Central Bank of Nigeria (CBN) has revealed a sharp increase in credit extended to the Federal Government, raising concerns among economists over the implications for inflation, interest rates, private sector investment and the stability of the naira.

According to the apex bank’s latest monetary statistics, credit to the Federal Government rose to N40.38 trillion in May 2026, representing a 75.6 per cent increase from N22.99 trillion recorded in May 2025.

On a month-on-month basis, government borrowing also increased by N779.7 billion, rising from N39.60 trillion in April to N40.38 trillion in May.

In contrast, credit to the private sector grew only marginally to N81.04 trillion, reinforcing concerns that commercial banks continue to favour lending to the government over businesses and households.

The figures also showed that Net Domestic Credit climbed to N121.42 trillion, reflecting increased liquidity within the financial system.

Economic analysts say the trend underscores the Federal Government’s growing reliance on domestic borrowing to finance budget deficits at a time when the Central Bank is pursuing tight monetary policies to curb inflation.

Speaking on the development, financial analyst and economist, Dr. Johnson Chukwu, said the rising level of government borrowing could complicate the CBN’s efforts to stabilise prices.

“When government borrowing expands at this pace, it injects significant liquidity into the economy. Unless that spending is matched by increased production of goods and services, inflationary pressures are likely to persist,” he said.

According to him, while domestic borrowing helps reduce dependence on external debt, it can also crowd out private investment if banks continue to channel more resources into government securities.

“The private sector is the engine of job creation and economic growth. If businesses struggle to access affordable credit because banks prefer lending to government, economic expansion could slow,” he noted.

Similarly, investment analyst and Managing Director of Arthur Stevens Asset Management Limited, Mr. Olatunde Amolegbe, observed that government securities remain attractive to banks because they are considered virtually risk-free and offer competitive returns.

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“Banks naturally gravitate towards assets that combine safety with attractive yields. Unless government borrowing moderates or lending risks in the private sector decline, this trend is unlikely to change,” he explained.

Analysts said the development could keep borrowing costs elevated across the economy.

With the Monetary Policy Rate (MPR) currently at 26.50 per cent, experts believe the CBN may have limited room to reduce interest rates unless inflation declines significantly and fiscal pressures ease.

High yields on Treasury Bills and Federal Government bonds, they argued, inevitably influence lending rates charged by commercial banks, making access to credit more expensive for manufacturers, farmers, small businesses and households.

Economist and public finance expert, Dr. Muda Yusuf, said prolonged high interest rates could weigh on economic growth by discouraging business expansion and investment.

“When financing costs remain high for a long period, businesses postpone expansion plans, entrepreneurs struggle to raise capital, and employment generation slows. That is one of the unintended consequences of excessive government borrowing,” he said.

Analysts explained that although borrowing in local currency reduces immediate dependence on external loans, persistent fiscal deficits financed through domestic borrowing could fuel inflation, weaken purchasing power and increase demand for foreign exchange.

“When inflation remains elevated, the purchasing power of the naira declines. Businesses and investors tend to seek safer assets, including foreign currencies, thereby exerting pressure on the exchange rate,” Chukwu added.

Despite recent relative stability in the foreign exchange market, economists warned that sustained government borrowing, weaker oil revenues or slower foreign exchange inflows could reverse recent gains.

While the CBN continues to maintain a tight monetary stance aimed at controlling inflation, experts argue that large fiscal deficits financed through domestic borrowing may undermine those efforts by expanding liquidity in the economy.

They stressed that stronger coordination between fiscal and monetary authorities would be critical to achieving price stability and sustainable economic growth.

According to the experts, while domestic borrowing remains an important financing option for governments, achieving a sustainable balance between fiscal spending and monetary discipline will be crucial to safeguarding macroeconomic stability and improving the welfare of Nigerians.