Nigeria’s total borrowing has surged to ₦45 trillion following the approval of an additional ₦15 billion as part of the latest government funding request. The development has sparked fresh concerns about the nation’s growing debt burden and its possible impact on the economy, especially on the naira and investor confidence.Here’s a breakdown of how rising debt levels could affect Nigeria:
- Inflation and Naira Devaluation
When a government borrows excessively and turns to printing money to meet its obligations, inflation often follows. As more money flows into the economy, the naira’s purchasing power may decline, leading to currency devaluation. A classic example is Zimbabwe in the early 2000s, where hyperinflation crippled the value of its currency due to unchecked money printing
- Drop in Investor Confidence
As debt rises, investors may begin to worry about Nigeria’s ability to repay. If the debt-to-GDP ratio becomes too high, it can trigger capital flight where investors pull out their funds. This reduces foreign investment and puts more pressure on the naira. Greece faced similar challenges during its debt crisis between 2009 and 2015
- Higher Interest Rates and Cost of Borrowing
To stabilize the naira and attract foreign investors, the Central Bank may be forced to increase interest rates. While this could help strengthen the currency in the short term, it also means Nigeria will pay more to service its debt placing more strain on public finances
- Credit Rating Risks
the country’s debt becomes too high, credit rating agencies may downgrade Nigeria’s rating. This makes it harder and more expensive for the government to borrow money in the future. In 2011, the U.S. faced a temporary shock after a downgrade by Standard & Poor’s, despite being a strong economy.
- External Debt and Pressure on Foreign Reserves
Much of Nigeria’s debt is owed in foreign currencies. This means the government needs dollars or other foreign currencies to repay it. If foreign reserves are low, the country might be forced to devalue the naira to support exports and boost earnings. Argentina experienced this several times in recent years due to foreign debt pressure.
As Nigeria’s debt profile grows, economists are urging the government to adopt more transparent and responsible borrowing practices. The focus, they say, should be on generating revenue, managing public spending, and avoiding loans that do not yield long-term economic benefits.
