Nigeria’s Public Debt Trajectory: Decline from 42.9% to 39.8% of GDP, Risks and Sustainability

Nigeria’s public debt has always been one of the most watched indicators of its economic health. The recent data showing a decline in debt-to-GDP ratio from 42.9% to 39.8% has sparked both optimism and debate. While some view it as a sign of improving fiscal discipline and a stronger economic rebound, others warn that the headline figure alone may not capture the underlying challenges in Nigeria’s debt management and sustainability.

The drop in Nigeria’s debt-to-GDP ratio may seem straightforward, but it is largely influenced by a mix of economic factors rather than a dramatic reduction in borrowing. The country’s gross domestic product has expanded due to better oil output, stronger non-oil growth, and improved nominal GDP figures. When GDP grows faster than debt accumulation, the ratio naturally declines.

In 2025, the federal government also slowed new borrowing, focusing on restructuring existing obligations and improving revenue collection through non-oil sources such as taxes and customs duties. These efforts, combined with a stronger naira and higher export earnings, contributed to the improved ratio.

However, a lower debt-to-GDP ratio does not necessarily mean Nigeria is out of danger. The real concern lies in the cost of servicing that debt and the structure of the obligations.

While the total debt ratio fell, Nigeria continues to spend a significant portion of its revenue on debt servicing. According to data from the Debt Management Office (DMO), debt service payments still account for more than 70% of federal revenue, leaving limited fiscal space for critical sectors like health, education, and infrastructure.

Most of Nigeria’s debt is domestic, denominated in naira, but the country also holds external obligations from multilateral and bilateral lenders. Although domestic borrowing reduces foreign exchange exposure, it often comes with high interest rates, reflecting tight monetary conditions and inflationary pressure.

The risk here is that the government may continue rolling over short-term debt at higher rates, increasing long-term vulnerability. Without stronger revenue mobilization, this cycle can lead to a growing debt service-to-revenue ratio even if total debt remains stable or falls slightly.

Debt sustainability goes beyond headline figures. Analysts measure it by examining how easily a government can meet its debt obligations without resorting to new borrowing or compromising essential spending. Nigeria’s current debt trajectory looks stable in the short term, but sustainability depends on consistent growth, efficient spending, and stronger revenue reforms.

Global economic conditions will also shape the country's debt outlook. Rising global interest rates make external borrowing more costly, while fluctuations in oil prices directly impact government revenue. Though Nigeria benefits from higher oil prices, persistent production shortfalls and subsidy-related spending can quickly erode these gains.

Exchange rate volatility is another risk. A sharp depreciation in the naira would raise the local currency cost of servicing external debt. Therefore, maintaining a stable foreign exchange environment is essential for debt sustainability.

For the ordinary masses, lower debt levels could create space for more developmental spending if managed prudently. But without structural reforms that improve productivity, diversify exports, and boost tax efficiency, the relief may be temporary.

The path to sustainable debt management lies in maintaining growth momentum while improving fiscal discipline. Reducing reliance on borrowing to fund recurrent expenditure and strengthening transparency in public finance will be key.