Nigeria has once again found itself in the spotlight for its external debt profile, ranking as the third-highest debtor in Africa, according to a new report by the African Export-Import Bank (Afreximbank).
Nigeria’s ranking underscores growing concerns about Nigeria’s external liabilities and the implications for economic stability, policy direction, and future borrowing capacity.
As Nigeria’s external debt load grows, stakeholders are increasingly focused on how the country’s borrowing is being managed, especially in relation to productivity, debt servicing, and economic growth.
This piece examines Nigeria’s position in the Afreximbank ranking, the structure of its external debt, and the broader context of public debt management in Africa’s largest economy.
Nigeria’s Place Among Africa’s Biggest External Debtors
Afreximbank’s African Trade Report 2024 reveals that Nigeria’s external debt stood at $41.6 billion in 2022, making the country the third-largest external debtor on the continent. Only Egypt ($164.2 billion) and South Africa ($96.7 billion) owe more to external creditors. Kenya ($36.7 billion) and Angola ($30.9 billion) round out the top five.
This ranking reflects a sustained pattern in Nigeria’s borrowing. External debt has steadily climbed over the past decade, driven largely by the need to finance budget deficits, infrastructure projects, and economic stimulus packages, particularly in response to external shocks such as the COVID-19 pandemic and fluctuations in oil prices.
The rise in Nigeria’s external debt coincides with broader fiscal challenges, including declining government revenues, heavy reliance on oil exports, and increased spending to stabilize the currency.
The external debt stock is not inherently problematic, but its composition and the burden of debt servicing raise concerns. According to Afreximbank, commercial borrowing (eurobonds and syndicated loans) accounts for a significant share of Nigeria’s external debt, exposing the country to interest rate risks and currency fluctuations.
Debt Servicing Pressures and the Fiscal Crisis
One of Nigeria’s most pressing challenges is the cost of servicing its external debt. The country’s debt service-to-revenue ratio has repeatedly exceeded 90%, meaning that for every N100 earned by the government, over N90 is spent on debt repayments. This leaves very little fiscal space for investments in critical infrastructure, healthcare, education, or economic diversification.
The increasing reliance on commercial loans has aggravated the debt servicing burden. Nigeria’s issuance of eurobonds, while providing quick access to foreign exchange, comes with significantly higher interest rates compared to concessional loans from institutions like the World Bank or the African Development Bank. As global interest rates rise, Nigeria’s debt servicing costs escalate, exacerbating fiscal pressures.
This trend was highlighted in a 2023 Arbiterz analysis, which noted that Nigeria’s shift toward expensive commercial debt has placed the country in a precarious position. With oil revenue volatility and weak non-oil revenue performance, Nigeria’s capacity to sustainably service its debt has come under scrutiny.
What Nigeria Spends its Borrowed Money On
The quality of spending funded by external borrowing is just as important as the size of the debt itself. A major criticism of Nigeria’s borrowing strategy is that much of the debt is used to fund recurrent expenditure, including salaries and administrative costs, rather than capital projects that could generate future revenue.
In contrast, countries like Egypt and Kenya have directed significant portions of external borrowing into infrastructure, energy, and technology projects. In Egypt, for instance, external loans have helped finance massive infrastructure development under the Suez Canal expansion and the construction of a new administrative capital. These projects, while increasing debt, are expected to boost economic growth and foreign exchange earnings in the medium to long term.
In Nigeria’s case, however, the return on borrowed funds is often difficult to quantify. Projects are either delayed, poorly executed, or fail to generate sufficient economic returns. This reduces the country’s ability to pay down debt from the proceeds of investment and forces further borrowing, creating a debt spiral.
Arbiterz has repeatedly called attention to Nigeria’s weak project evaluation and management capacity, which contributes to the low productivity of public investments funded by debt. Without reforms to improve the quality of public spending, Nigeria’s rising debt stock could become increasingly unsustainable. An improvement in Nigeria’s fiscals is the eradication of the fuel subsidy.
The Road Ahead: Restructuring Debt and Strengthening Revenue
Nigeria’s growing external debt underscores the urgent need for a comprehensive debt management strategy. This requires not only limiting the accumulation of new debt but also restructuring existing obligations to reduce debt servicing costs.
Analysts have suggested that Nigeria explore refinancing expensive eurobonds with cheaper bilateral or multilateral loans. Others argue that Nigeria should prioritize concessional financing tied to specific projects with measurable outcomes.
However, debt restructuring alone is insufficient. Nigeria’s fundamental challenge lies in its weak revenue generation. With a tax-to-GDP ratio of less than 10%, Nigeria ranks among the lowest in the world in terms of revenue mobilization. Expanding the tax base, curbing tax evasion, and improving the efficiency of revenue collection are critical for reducing dependence on borrowing.
Another key policy shift needed is aligning borrowing with economic transformation goals. Borrowing should be linked directly to projects that enhance productivity, such as investments in power generation, digital infrastructure, and industrial development. Nigeria’s newly restructured economic team, led by the Minister of Finance and Coordinating Minister of the Economy, must enforce stricter borrowing guidelines that prioritize high-impact, revenue-generating projects.
Finally, Nigeria must also deepen domestic debt markets to reduce external borrowing risks. Developing a more vibrant and diverse domestic bond market would allow the government to raise capital locally, reducing exposure to currency volatility and external interest rate shocks. This shift could also help mobilize domestic savings into productive investments, enhancing economic resilience.
Nigeria’s ranking as Africa’s third-largest external debtor is a sobering reminder of the country’s fiscal vulnerability. While external borrowing is not inherently bad, its effectiveness depends heavily on how the funds are used and whether they translate into economic growth.
With mounting debt servicing costs, poor returns on public investment, and weak revenue performance, Nigeria’s debt profile is a growing threat to fiscal stability. Reforms in debt management, revenue mobilization, and public spending are urgently needed if Nigeria hopes to escape the debt trap and chart a sustainable path to economic growth.
