Nigeria’s projected N20.12 trillion budget deficit for the 2026 fiscal year threatens to severely constrain private sector access to credit.
According to the 2026–2028 Medium-Term Expenditure Framework (MTEF), the federal government plans to finance N14.30 trillion—approximately 71.1% of the total deficit—through domestic borrowing. Analysts warn this strategy will trigger sustained high interest rates and limit liquidity for corporate entities.
Okay News reports that while the domestic market has the capacity to absorb this volume of debt, it will not happen without significant economic strain. David Adonri, CEO of Highcap Securities, stated: “The domestic market can absorb N14.30 trillion, but not without strain. Absorption will occur through higher yields rather than surplus liquidity. This is crowding out risk. Corporations will raise funds at yields that outpace the government’s yield. Debt-funded growth becomes extremely difficult in that environment.”
The Impact Of Government Borrowing On Private Credit
Heavy federal reliance on the domestic debt market typically pushes yields on government securities higher. This creates a “risk-free” benchmark that forces all other borrowers to price their debt at higher rates, making commercial papers and bank loans more expensive for businesses.
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Interest Rate Surge: With the Monetary Policy Rate (MPR) currently at 27%, corporate borrowing rates could rise to between 25% and 30%.
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Liquidity Constraints: As the government absorbs local capital, less funding remains available for private sector participation in the economic recovery.
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SME Vulnerability: Small and medium enterprises are hit hardest as they must either pay significantly higher yields or exit the debt market entirely.
Fiscal Shift Toward Domestic Funding
The move to fund over 70% of the deficit from the domestic market marks a structural shift from external debt sources. This is driven by tighter external borrowing conditions and rising debt service costs, which are projected to consume nearly 45% of expected government revenue in 2026.
The Debt Management Office (DMO) data shows a steady climb in domestic borrowing from N2.34 trillion in 2021 to the current record projections. Analysts emphasize that while the market has the “mechanical capacity” to absorb this debt, the resulting high cost of capital will likely slow job creation and sustainable growth.
