By Uche Uwaleke

Nigeria’s public debt has become one of the defining economic policy issues of our time. While debates often focus on the size of the debt, a more fundamental question deserves greater attention: what is the composition of Nigeria’s debt portfolio, and does it support long-term economic transformation? The answer to this question is far more consequential than the headline debt figure itself.

Countries have borrowed heavily and prospered because their borrowing financed productive assets that generated growth, employment, and future revenues.

Others have accumulated debt without creating corresponding economic value, leaving future generations with liabilities but few productive assets.

Nigeria stands at this important crossroads.

According to the Debt Management Office (DMO), Nigeria’s total public debt stood at N159.3 trillion (about US$111 billion) as of 31 December 2025.

Domestic debt accounted for 53.27 percent of the total, while external debt represented 46.73 percent. On the surface, this distribution appears balanced. However, a closer examination reveals structural weaknesses that should concern policymakers.

Within the domestic debt stock, Federal Government of Nigeria (FGN) Bonds accounted for more than 79 percent, while infrastructure-specific instruments such as Sukuk and Green Bonds represented less than two percent.

The external debt profile reveals a similar pattern. Eurobonds constituted about 36 per cent of external debt but accounted for more than half of external debt service obligations.

By contrast, concessional loans from multilateral institutions such as the World Bank Group and the African Development Bank made up roughly 46 per cent of external debt yet imposed significantly lower debt servicing costs.

These figures reveal that Nigeria’s debt challenge is not primarily one of quantity but of quality. The country increasingly relies on relatively expensive, discretionary commercial borrowing rather than project-linked financing tied directly to productive investments.

This financing model undermines both fiscal sustainability and economic development.

This trend partly explains why Nigeria continues to experience a debt service-to-revenue ratio exceeding 60 percent despite maintaining a relatively modest debt-to-GDP ratio by international standards.

It goes without saying that debt sustainability is ultimately determined not by debt relative to GDP alone but by government’s capacity to generate sufficient revenue to service its obligations without crowding out essential public expenditure.

When a large share of government revenue is devoted to debt servicing, fiscal space for education, healthcare, security, social protection, and infrastructure becomes severely constrained.

The current composition of Nigeria’s public debt also raises important questions regarding compliance with the spirit and letter of Section 41 of the Fiscal Responsibility Act, 2007.

The Act provides that governments at all levels should borrow only for capital expenditure and human development on concessional terms or on terms that are economically beneficial.

The legislative intent was unmistakable: borrowing should finance investments that expand the productive capacity of the economy rather than recurrent consumption or discretionary spending.

Yet the overwhelming dominance of conventional FGN Bonds and commercial Eurobonds creates significant room for discretion regarding the ultimate application of borrowed funds. Unlike Sukuk, Green Bonds, and other infrastructure-specific financing instruments, conventional bonds are generally not tied to clearly identifiable projects with measurable outputs.

Consequently, it becomes considerably more difficult to track whether borrowed resources are deployed toward productive capital formation or absorbed into recurrent expenditure and other non-productive uses.

The consequences are visible across Nigeria’s infrastructure landscape. The country’s infrastructure stock remains below 40 per cent of GDP which is among the lowest in Sub-Saharan Africa and substantially below the levels required to sustain rapid industrialization, enhance competitiveness, and stimulate broad-based economic growth.

The persistent deficits in transportation networks, electricity infrastructure, water supply, healthcare facilities, educational institutions, and digital connectivity continue to constrain private investment and limit productivity.

Infrastructure financing should therefore occupy the centrepiece of Nigeria’s debt management strategy rather than remain a peripheral consideration. Borrowing is not inherently detrimental.

Indeed, well-structured public borrowing has historically played a critical role in the economic transformation of many successful emerging economies. What distinguishes successful borrowers from unsuccessful ones is the discipline with which debt is linked to productive investment.

Malaysia offers an instructive example. Over several decades, the country successfully utilized infrastructure-oriented financing instruments, particularly Sukuk, to finance highways, airports, seaports, rail transportation, energy infrastructure, and urban development.

By directly linking financing to specific infrastructure projects, Malaysia enhanced transparency, strengthened investor confidence, improved project monitoring, and ensured that borrowed funds created tangible public assets capable of supporting long-term economic growth.

Indonesia has similarly expanded the use of sovereign Sukuk to finance roads, bridges, airports, rail networks, and other strategic infrastructure.

Because these instruments are tied to clearly defined projects, investors can identify the assets being financed, while government agencies remain accountable for project delivery. This approach has contributed significantly to Indonesia’s infrastructure expansion over the past decade.

Chile and Canada provide additional examples through their extensive use of infrastructure bonds to finance transportation systems, water infrastructure, renewable energy, and other public assets under robust governance frameworks.

These countries demonstrate that infrastructure-focused borrowing can attract long-term institutional investors while simultaneously strengthening fiscal credibility.

The common lesson from these experiences is straightforward. When borrowing is linked directly to identifiable infrastructure projects, governments are better positioned to establish clear Key Performance Indicators (KPIs), monitor implementation, evaluate outcomes, and minimize diversion of funds.

Infrastructure bonds naturally promote transparency because the proceeds are ring-fenced for specified investments rather than merged into general budgetary financing.

Nigeria should therefore fundamentally rethink the architecture of its public debt portfolio. The objective should not simply be to borrow less, but to borrow better.

First, government should significantly reduce reliance on discretionary borrowing instruments in favour of project-linked financing vehicles such as Sukuk, Green Bonds, Infrastructure Bonds, Diaspora Infrastructure Bonds, and other asset-backed instruments.

Every major borrowing programme should be associated with clearly identified projects capable of generating measurable economic and social returns.

Second, the Fiscal Responsibility Act should be amended to explicitly require that a substantially higher proportion of public borrowing be project-tied.

While Section 41 establishes an important principle, greater legislative clarity is required to eliminate ambiguity in implementation.

The amended law should require that loan requests submitted to the National Assembly identify the specific projects to be financed, expected economic returns, implementation timelines, performance indicators, and monitoring mechanisms.

Beyond this, the legislation should include meaningful enforcement provisions.

Where government persistently violates statutory borrowing conditions or diverts borrowed funds from approved projects, subsequent borrowing requests should not receive legislative approval until compliance has been restored.

Such a provision would strengthen fiscal discipline and reinforce the constitutional oversight role of the National Assembly.

Third, the Debt Management Office should incorporate a substantially larger allocation for infrastructure bonds within its Medium-Term Debt Management Strategy.

Debt management should evolve beyond merely securing financing at the lowest possible cost. It should explicitly support national development objectives by ensuring that debt accumulation translates into productive public capital capable of expanding the economy’s future revenue base.

Fourth, Nigeria should adopt explicit fiscal rules limiting excessive dependence on expensive commercial debt.

In particular, government should establish a prudent ceiling for the debt service-to-revenue ratio within its fiscal framework.

Such a benchmark would serve as an early warning mechanism against excessive exposure to high-cost commercial borrowing, particularly Eurobonds, whose servicing costs become increasingly burdensome during periods of rising global interest rates and exchange rate depreciation.

Finally, Nigeria should reconsider the current domestic-to-external debt composition. The existing ratio of approximately 53:47 exposes the country to considerable exchange rate and refinancing risks.

In an increasingly uncertain global financial environment characterized by volatile capital flows, elevated interest rates, geopolitical instability, and a strengthening United States dollar, excessive external commercial borrowing magnifies fiscal vulnerability.

A more prudent medium-term objective would be to adjust the debt portfolio toward a 70:30 domestic-to-external ratio.

A larger domestic debt component would reduce foreign exchange exposure, improve debt sustainability, deepen Nigeria’s domestic capital market, mobilize long-term domestic savings, and provide greater policy flexibility during periods of global financial stress.

External borrowing should increasingly prioritize concessional financing from multilateral and bilateral development partners while limiting reliance on expensive commercial Eurobonds except where economically compelling.

All said, the debate on Nigeria’s public debt should move beyond simplistic discussions about whether the country should borrow.

The more important question is whether every naira and every dollar borrowed creates productive assets that improve the welfare of citizens and strengthen the economy’s future capacity to generate income.

It is a no-brainer that borrowing that finances roads, railways, power infrastructure, irrigation systems, renewable energy, broadband connectivity, and industrial parks constitutes an investment in national prosperity.

Borrowing that merely finances consumption or recurrent expenditure leaves little more than future repayment obligations.

Nigeria possesses enormous economic potential. Unlocking that potential requires a debt strategy that places productive investment at its core.

The country must transition from discretionary borrowing to disciplined, infrastructure-driven financing anchored on transparency, accountability, measurable outcomes, and fiscal sustainability.

Such a shift would not only improve the quality of Nigeria’s public debt portfolio but also restore public confidence that borrowed resources are being invested where they matter most.

Changing the narrative in Nigeria’s public debt portfolio is therefore not simply a matter of financial engineering. It is an economic imperative.

The structure of public debt must become an instrument for building national wealth rather than merely financing government expenditure.

Until that transformation occurs, Nigeria will continue to accumulate liabilities faster than productive assets.

The time has come to align the nation’s borrowing strategy with its development aspirations, ensuring that every debt contracted today lays the foundation for greater prosperity tomorrow.

Prof Uche Uwaleke, a Financial Economist, is the Director of the Institute of Capital Market Studies at the Nasarawa State University Keffi and President of the Capital Market Academics of Nigeria