The Federal Government’s domestic borrowing surged by 75.6 per cent in the 12 months to May 2026, raising fresh concerns over the outlook for inflation, interest rates and the stability of the naira.
Fresh data released by the Central Bank of Nigeria (CBN) shows that credit to the Federal Government rose to ₦40.38 trillion in May 2026, up sharply from ₦22.99 trillion recorded in the corresponding period of 2025.
The figures also show that government borrowing increased by ₦779.7 billion between April and May 2026 alone, underscoring the pace at which the government is relying on the domestic financial system to finance its fiscal obligations.
In contrast, credit to the private sector expanded only modestly to ₦81.04 trillion, suggesting that while banks continue to fund businesses and households, government borrowing remains the dominant driver of credit growth.
The trend highlights a growing imbalance in Nigeria’s credit market, with analysts warning that sustained public sector borrowing could crowd out private investment, keep borrowing costs elevated and sustain pressure on consumer prices.
Economists say aggressive government borrowing injects additional liquidity into the financial system as banks channel funds into Treasury Bills and Federal Government bonds rather than extending more credit to businesses.
The funds are subsequently deployed to finance public expenditure, including infrastructure, salaries, debt servicing and other budgetary commitments.
While such spending supports economic activity, it can also increase the money supply faster than the production of goods and services, creating inflationary pressures.
CBN data shows that net domestic credit climbed to ₦121.42 trillion in May, reflecting the continued expansion of liquidity within the economy.
Although inflation has moderated in recent months, analysts caution that persistent fiscal expansion could slow the pace of disinflation, particularly if domestic production fails to keep pace with rising demand.
For consumers, this means the prices of food, transportation and other essentials could remain elevated despite improvements in headline inflation figures.
The sharp increase in government borrowing is also expected to keep interest rates elevated.
Commercial banks generally view lending to the Federal Government as safer than lending to private businesses because government securities carry minimal default risk while offering attractive returns.
As a result, banks may continue to allocate a larger share of their portfolios to government instruments, reducing credit available to businesses.
This phenomenon, often described as “crowding out,” increases borrowing costs for manufacturers, farmers, small businesses and households seeking loans.
With the Monetary Policy Rate (MPR) currently at 26.5 per cent, analysts believe the CBN is likely to maintain its tight monetary stance until inflation shows a sustained decline.
Higher yields on government securities are also expected to push up lending rates across the financial system, making mortgages, vehicle financing and business loans more expensive.
While savers may benefit from relatively higher returns on deposits and fixed-income investments, prolonged high interest rates could slow business expansion and job creation.
The surge in domestic borrowing presents a mixed outlook for the naira.
On one hand, borrowing in local currency reduces the government’s dependence on external debt and limits immediate demand for foreign exchange.
On the other hand, if increased borrowing fuels inflation, it weakens the purchasing power of the naira and may encourage greater demand for foreign currencies as a store of value.
Higher inflation can also erode Nigeria’s competitiveness by making locally produced goods more expensive relative to imports.
Analysts warn that if fiscal deficits remain elevated and foreign exchange inflows weaken, renewed pressure could emerge in both the official and parallel foreign exchange markets.
