Nigeria's Debt Servicing Versus Capital Expenditure: A Fiscal Crisis Analysis

Nigeria's fiscal health is facing unprecedented strain as debt servicing obligations consume an increasingly large portion of government revenue, leaving minimal resources for critical infrastructure and development projects. Recent data reveals a disturbing trend where the government is spending significantly more to service existing debts than it invests in building Nigeria's future through capital expenditure. This fiscal analysis examines the allocation of Nigeria's financial resources in the  2025 budget, and discusses the profound long-term implications for economic growth and development in Africa's most populous nation.

Current Budget Allocation: Alarming Priorities

The proposed 2025 federal budget presents a stark picture of Nigeria's fiscal challenges. With total expenditure projected at ₦49.74 trillion, the government plans to allocate ₦16.33 trillion specifically for debt servicing, representing approximately 33% of the total budget. In comparison, capital expenditure is allocated ₦14.85 trillion, while recurrent non-debt spending will receive ₦14.12 trillion. This means debt servicing exceeds capital spending by approximately 10%, highlighting the tremendous burden that existing obligations place on the nation's development prospects.

The budget framework indicates that Nigeria plans to fund this spending through projected revenues of ₦36.35 trillion, leaving a deficit gap of ₦13.39 trillion that will likely require additional borrowing, perpetuating the cycle of debt accumulation. This structural imbalance between revenue generation and expenditure commitments remains at the heart of Nigeria's fiscal challenges.

The Revenue Challenge: Debt Service Overwhelms Earnings

Perhaps the most alarming metric emerges when comparing debt servicing costs to actual government revenue. In January 2025 alone, Nigeria's debt service obligations hit ₦696.27 billion, while total retained revenue amounted to only ₦483.47 billion. This means debt servicing consumed approximately 144% of government earnings for that month. While monthly figures can fluctuate, this dramatic imbalance demonstrates the unsustainable nature of current fiscal policies.

The situation appears particularly dire when examining first-quarter 2025 data. Nigeria spent $2.01 billion (₦3.08 trillion) on debt servicing in the first four months of 2025, representing a 49.2% year-on-year increase from the $1.34 billion (₦2.06 trillion) recorded during the same period in 2024. This rapid acceleration of debt servicing costs threatens to crowd out essential government spending on infrastructure, education, and healthcare.

Long-Term Implications for Economic Growth

The disproportionate allocation of resources to debt servicing rather than productive investment has severe consequences for Nigeria's long-term economic prospects:

1. Infrastructure Deficit: With debt servicing exceeding capital expenditure, Nigeria continues to fall behind in addressing its massive infrastructure gap. Inadequate investment in transportation, energy, and digital infrastructure reduces economic competitiveness and limits productivity growth across all sectors.

2. Crowding Out Effect: High government borrowing to finance deficits elevates interest rates for private businesses, making it more difficult for them to access credit for expansion and innovation. This constrains private investment, which is essential for sustainable job creation and economic diversification.

3. Reduced Human Capital Development: Limited fiscal space means less funding for education and healthcare, undermining the development of Nigeria's most valuable resource: its human capital. With approximately 42% of Nigerians living in poverty as of 2023, underinvestment in social services perpetuates cycles of inequality and limits opportunities for meaningful participation in the economy.

4.  Intergenerational Equity: Current debt accumulation patterns essentially transfer the fiscal burden to future generations who will inherit these obligations without necessarily benefiting from the spending that generated them. This raises serious questions about intergenerational equity and sustainable public finance management.

Nigeria's fiscal challenge represents a classic tension between present obligations and future needs. While debt servicing is necessary to maintain credibility and access to international capital markets, excessive allocation to debt repayment at the expense of capital investment threatens to undermine long-term economic prospects.

The current situation, where debt servicing consumes 144% of monthly revenue and exceeds capital expenditure in the budget, is clearly unsustainable. Without decisive action to boost revenues, rationalize expenditures, and strategically manage debt, Nigeria risks entering a debt trap where an increasingly large portion of resources is diverted from productive investment to service past obligations.