Debt Service Tops Development Spending in 2026 Budget

Debt Service Overshadows Key Sectors in 2026 Budget

NIGERIA’S proposed 2026 budget has triggered intense scrutiny after figures presented to the Senate Committee on Appropriations revealed that debt servicing will exceed combined spending on critical development sectors.

At a budget hearing before lawmakers of the National Assembly of Nigeria, Adetilewa Adebajo, Chief Executive Officer of CFG Advisory, described the fiscal outlook as a “structural crisis” that requires urgent correction.

According to the framework under review, ₦15.09 trillion has been earmarked for debt servicing in 2026 — marginally higher than the ₦15.02 trillion allocated collectively to Works, Defence, Education, Health, Agriculture, Police and Power.

“This is not just a fiscal anomaly,” Adebajo told lawmakers. “It is a structural crisis that demands immediate and disciplined response.”

When Debt Outpaces Development

The implication of the allocation pattern is stark: the government intends to spend more servicing past loans than investing in infrastructure, security, human capital and energy — sectors widely regarded as the foundation of economic growth.

Economists warn that such a structure narrows fiscal space and constrains long-term development.

A senior Lagos-based economist described the situation as “deeply troubling,” noting that when debt service exceeds development expenditure, fiscal flexibility is severely limited.

“Government begins to operate primarily to sustain its liabilities rather than build productive capacity,” he said.

Analysts stress that borrowing is not inherently problematic. The critical issue is whether borrowed funds generate returns that exceed borrowing costs. If loans finance productive assets, they can stimulate growth. However, when debt service crowds out capital investment, sustainability concerns intensify.

A Deficit of Historic Scale

Beyond debt servicing, the projected fiscal deficit of ₦25.27 trillion has amplified concerns.

The figure nearly equals the total value of Nigeria’s pension assets, estimated at ₦27.45 trillion — a comparison that underscores the scale of the financing gap.

Adebajo indicated that capital markets may absorb roughly half of the deficit. However, questions remain about how the remaining balance will be funded.

Market analysts warn that additional borrowing could place pressure on domestic liquidity and external financing conditions.

Jibrin Mohammed, a fixed-income strategist, cautioned that financing even half of a ₦25 trillion deficit would stretch the bond market.

“The domestic market has grown significantly, but absorption capacity is not infinite,” he explained. “Heavy sovereign borrowing can crowd out private sector credit and push up interest rates.”

Higher benchmark rates, he added, would translate into more expensive loans for businesses, potentially slowing investment and job creation.

Pension Funds and Sovereign Exposure

The near equivalence between the fiscal deficit and pension assets has also raised questions about systemic exposure.

Pension fund administrators hold substantial amounts of government securities due to their relative safety. However, over-reliance on pension funds for deficit financing could increase macroeconomic vulnerability.

Josephine Emmanuel, a pension consultant based in Abuja, explained that while government bonds align with capital preservation objectives, persistent fiscal deficits elevate systemic risk.

“When deficits widen consistently, sovereign exposure becomes a macroeconomic concern,” she said.

She emphasised that long-term pension sustainability depends on macroeconomic stability, inflation control and credible fiscal consolidation.

The Structural Challenge

Experts argue that the 2026 debate reflects deeper structural weaknesses in Nigeria’s public finance architecture.

Among them are low revenue mobilisation relative to GDP, dependence on oil earnings, high recurrent spending and rising debt service obligations.

Nigeria’s tax-to-GDP ratio remains among the lowest globally, limiting the government’s ability to finance capital projects without borrowing.

A professor of public finance described the situation as a “revenue–expenditure mismatch crisis.”

“The core problem is not debt alone,” he said. “It is revenue growth failing to keep pace with expenditure commitments.”

Without comprehensive tax reforms, subsidy rationalisation and stricter expenditure discipline, deficits could persist or widen further.

Market and Investor Implications

Fiscal metrics such as debt-to-revenue ratios and deficit levels significantly influence investor confidence.

An investment banker familiar with sovereign issuances noted that international markets closely monitor debt sustainability indicators.

“When debt service consumes a dominant share of revenue, credit rating agencies take notice,” he said. “That affects external borrowing costs.”

He added that clarity on financing strategy — whether through domestic borrowing, concessional multilateral funding or revenue reforms — will be critical in shaping market perception.

A Defining Fiscal Crossroads

Despite the sobering figures, analysts say the trajectory can be corrected through deliberate reform.

Recommended measures include expanding the tax base, accelerating non-oil revenue diversification, prioritising capital expenditure, restructuring high-cost debt and strengthening public financial management.

“The numbers demand discipline,” Adebajo concluded. “The challenge is not merely balancing a budget, but restoring structural stability.”

As lawmakers review the proposals, the 2026 budget may mark a defining moment in Nigeria’s fiscal evolution — one that will determine whether debt remains a tool for growth or becomes a constraint on national development.