Nigeria’s projected N20.12 trillion budget deficit for the 2026 fiscal year could severely constrain access to credit for the private sector, analysts have warned.
According to the 2026–2028 Medium-Term Expenditure Framework, the federal government plans to finance N14.30 trillion, about 71.1 percent of the total deficit, through domestic borrowing. Analysts say this level of borrowing may be technically feasible but could trigger sustained high interest rates, limit credit availability for corporates, and intensify competition for limited liquidity in the financial system.
Blakey Ijezie, founder of Okwudili Ijezie & Co, said the domestic market can absorb N14.30 trillion but not without strain. “The scale remains unusually large by historical standards. Absorption will occur through higher yields rather than surplus liquidity. This is crowding out risk,” he said.
David Adonri, chief executive of Highcap Securities, warned that corporations will raise funds at yields that outpace the government’s yield. “Debt-funded growth becomes extremely difficult in that environment,” Adonri said.
Analysts agreed that while the capacity exists, the cost implications for private sector financing could be steep, with companies more likely to raise capital at much higher interest rates.
The federal government’s reliance on the domestic debt market has grown in recent years, driven by rising fiscal deficits and tighter external borrowing conditions. Data from the Debt Management Office shows domestic borrowing rose from N2.34 trillion in 2021 to N8.58 trillion in 2024, with the 2025 budget marking a turning point.
In 2023, domestic borrowing spiked to N7.0 trillion before rising again to N8.58 trillion in 2024. The 2025 fiscal framework marked a structural shift, placing heavier emphasis on local funding sources as Nigeria moved further away from external debt sources.
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Tilewa Adebajo, chief executive of CFG Advisory, noted the market’s mechanical capacity to absorb the debt but only at a cost. He warned of rising interest rates, limited liquidity, and diminished credit access for businesses, with investors increasingly favouring sovereign instruments and crowding out small and medium enterprises and private enterprises.
Analysts estimate corporate borrowing rates could rise to between 25 percent and 30 percent, especially for riskier firms. The crowding-out effect may slow growth and restrict private sector participation in economic recovery.
Heavy government borrowing from the domestic market pushes yields on government securities higher, making commercial papers less attractive unless corporates offer significantly higher interest rates. Higher commercial paper yields increase funding pressure on firms, especially those relying on short-term borrowing.
Government borrowing raises the risk-free benchmark, forcing all other borrowers to price at higher rates. Liquidity is increasingly absorbed by federal government securities, leaving less funding available for the private sector, with small and medium enterprises hit hardest as they must either pay much higher yields or exit the debt market entirely.
The Monetary Policy Rate currently stands at 27 percent, with banks applying additional margins for risk and cost. Corporate borrowers with strong credit may negotiate closer to prime lending rates, but smaller firms face even higher costs.
Securities and Exchange Commission-approved commercial papers as of October 2025 stood at N1.37 trillion, with a utilisation rate of 54 percent. Analysts expect issuance activity to stay elevated in 2026 if access to long-term bank credit remains limited.
