IMF Cautions Nigeria Over Rising Dependence on Domestic Borrowing

The International Monetary Fund (IMF) has warned Nigeria against its growing reliance on domestic borrowing to finance fiscal deficits, cautioning that the trend could crowd out private sector investment, drive up interest rates, and hinder long-term economic growth.In its latest country assessment report, the IMF observed that while domestic borrowing remains a viable short-term financing tool, Nigeria’s increasing dependence on local debt markets poses risks to macroeconomic stability and private sector competitiveness. The Fund advised the Federal Government to diversify its financing mix and strengthen revenue mobilisation through tax reforms and fiscal discipline.

According to the IMF, the federal government’s domestic debt has risen sharply over the past three years, surpassing ₦50 trillion as of mid-2025. This surge, the Fund said, has placed significant pressure on the financial system, as banks and institutional investors continue to absorb a large portion of government securities at the expense of private lending.

“Excessive domestic borrowing constrains credit availability to productive sectors, raises financing costs, and may ultimately slow economic recovery,” the IMF report stated. “Nigeria needs to adopt a balanced strategy that combines prudent borrowing, revenue generation, and efficient expenditure management.”

The IMF’s warning comes amid Nigeria’s persistent struggle to manage its debt obligations. The Debt Management Office (DMO) recently disclosed that the country’s total public debt has climbed to over ₦121 trillion, with domestic debt accounting for nearly 60 percent.

Economic analysts have echoed the IMF’s concerns, noting that the government’s dependence on local borrowing has contributed to rising interest rates and liquidity constraints in the banking sector. The Central Bank of Nigeria (CBN) has been compelled to tighten monetary policy to curb inflation, which recently hovered around 18 percent, while maintaining exchange rate stability.

Dr. Amina Yusuf, an economist at the University of Lagos, said the government’s borrowing pattern is unsustainable in the long run. “When the government borrows heavily from the domestic market, it crowds out private investors who need access to affordable credit. The result is slower industrial growth, higher unemployment, and reduced consumer spending,” she explained.

The IMF further urged the Nigerian government to prioritise structural reforms that can boost non-oil revenue, including the expansion of the tax base, improved compliance, and elimination of redundant tax incentives. The Fund also called for enhanced transparency in public spending to ensure borrowed funds are channeled toward productive infrastructure and social investments.

It noted that Nigeria’s interest payments on debt now consume a significant portion of its revenues, leaving limited fiscal space for capital expenditure. The IMF projected that, without meaningful reforms, debt servicing could account for more than 70 percent of government revenue by 2026, a level it described as “unsustainable and risky.”

The Fund advised Nigeria to explore concessional external financing and public-private partnerships (PPPs) to reduce pressure on the domestic financial system. It said that well-structured external borrowing, coupled with prudent debt management, could provide the country with longer repayment periods and lower interest costs.

In response to the IMF’s recommendations, the Federal Ministry of Finance stated that domestic borrowing remains part of the government’s medium-term debt strategy, which aims to strike a balance between domestic and external financing. A senior official from the ministry noted that the government is cautious about excessive foreign borrowing due to exchange rate risks and external shocks.

“We recognise the need to diversify our financing sources while maintaining debt sustainability,” the official said. “The government is strengthening fiscal reforms, expanding non-oil revenue, and improving efficiency in public expenditure to reduce reliance on borrowing over time.”

The IMF also acknowledged Nigeria’s progress in certain fiscal reforms, including efforts to digitalise tax collection and improve budget transparency. However, it emphasised that more must be done to tackle revenue leakages, rationalise subsidies, and reduce recurrent spending.

Financial market experts believe that reducing domestic borrowing would create room for private sector credit expansion, which is crucial for job creation and economic diversification. They suggested that the government should channel more effort into attracting long-term investments through infrastructure bonds, diaspora financing, and international development partnerships.

“Nigeria’s domestic debt market has become overstretched,” said financial analyst, John Adebayo. “A strategic shift toward alternative financing sources — particularly concessional loans and equity-based funding — will ease pressure on local banks and promote economic growth.”

The IMF concluded that Nigeria’s economic outlook remains positive but fragile, hinging on sustained fiscal consolidation, structural reforms, and improved debt management. It reaffirmed its commitment to working closely with Nigerian authorities to design and implement policies that support inclusive and sustainable growth.

As Nigeria continues to balance its fiscal priorities, the IMF’s caution serves as a reminder of the delicate trade-off between financing development and maintaining macroeconomic stability.