Nigeria’s projected N20.12 trillion budget deficit for the 2026 fiscal year may significantly restrict access to credit for the private sector, analysts have cautioned, as the federal government prepares to rely heavily on domestic borrowing to finance its spending gap.
According to the 2026–2028 Medium-Term Expenditure Framework (MTEF), the government plans to fund N14.30 trillion—about 71.1% of the total deficit—through domestic borrowing.
While experts say the market may technically absorb this level of debt, they warn it could trigger prolonged high interest rates, reduce credit availability for corporate borrowers, and intensify competition for scarce liquidity within Nigeria’s financial system.
Financial analysts who spoke highlighted the risk of the government crowding out private-sector borrowers 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).
Mr. David Adonri, CEO of Highcap Securities, said the scale of borrowing is unusually large by historical standards and would likely be absorbed through higher yields rather than surplus liquidity.
“This is crowding out risk,” he warned. “Corporations will raise funds at yields that outpace the government’s yield. Debt-funded growth becomes extremely difficult in that environment.”
Analysts agreed that while capacity exists in the domestic market, the cost implications for private sector financing could be steep. They warned that businesses could be forced to raise capital at significantly higher interest rates.
Nigeria’s dependence on domestic debt has surged in recent years due to rising fiscal deficits and stricter 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.
The 2025 budget marked a major shift, placing greater emphasis on local funding sources.
In 2023, domestic borrowing jumped to N7.0 trillion before rising further to N8.58 trillion in 2024.
Analysts describe the 2025 framework as a structural shift from complementary support to primary reliance on domestic markets, driven by rising debt service costs and reform-related spending.
As Nigeria moves away from external borrowing, the domestic market is increasingly absorbing the government’s funding needs—raising concerns about long-term sustainability.
The proposed N14.30 trillion domestic borrowing for 2026 has sparked debate about whether Nigeria’s capital markets can handle the demand without distorting credit flows.
Mr. Tilewa Adebajo, CEO of CFG Advisory, said the market has “mechanical capacity” to absorb the debt but warned it would come at a high cost.
READ ALSOL: Nigerian man admits murder of 23-year-old woman in UK after sour relationship
He predicted rising interest rates, reduced liquidity, and limited credit access for businesses, as investors increasingly favour sovereign instruments over private-sector debt.
Analysts estimate corporate borrowing rates could rise to between 25% and 30%, particularly for riskier firms. The crowding-out effect could slow economic growth and restrict private sector participation in Nigeria’s recovery.
Heavy government borrowing pushes yields on federal government securities higher, making corporate debt instruments such as commercial papers (CPs) less attractive unless issuers offer significantly higher returns.
Higher CP yields increase funding pressure on firms, especially those reliant on short-term borrowing. As the risk-free benchmark rises, all borrowers are forced to price at higher rates, and liquidity becomes increasingly absorbed by government securities.
While domestic borrowing may help close Nigeria’s fiscal gap in the short term, analysts warn it could crowd out private-sector activity and undermine long-term growth prospects. The country’s fiscal strategy comes amid rising benchmark rates and tight credit conditions.
Nigeria’s Monetary Policy Rate (MPR) currently stands at 27%, with banks applying additional risk margins. While strong corporate borrowers may negotiate closer to prime lending rates, smaller firms are expected to face even higher costs.
As of October 2025, SEC-approved commercial papers stood at N1.37 trillion with a utilisation rate of 54%. Analysts expect issuance activity to remain elevated in 2026 if access to long-term bank credit stays limited.