Nigeria’s debt service squeeze deepens as health spending lags

Nigeria and Ghana are spending significant portions of public resources servicing external debt at a time when governments are under pressure to expand healthcare and infrastructure spending, highlighting the growing squeeze on fiscal space across West Africa, the African Development Bank (AfDB) has warned.

The AfDB, in its 2026 Regional Economic Outlook for West Africa, said debt-service obligations are increasingly competing with critical development expenditure, with Nigeria and Ghana among the countries where external debt-interest payments rival or exceed public health spending as a share of gross domestic product.

The warning comes as Nigeria’s debt-servicing burden remains elevated despite a decline in external debt-service payments, with the Federal Government spending N3.14 trillion servicing domestic debt in the first quarter of 2026, up 20.3 per cent from N2.61 trillion a year earlier.

Nigeria also spent $954.06 million on external debt service during the period, although this represented a 31.5 per cent decline from the $1.39 billion recorded in the corresponding quarter of 2025.

The figures underline the structural challenge facing the government: while external debt-service costs have moderated, rising domestic borrowing costs continue to consume a growing share of government resources, limiting the funds available for productive investment and social services.

The AfDB said the problem extends beyond the size of debt itself, warning that the cost of servicing accumulated obligations is increasingly determining how much governments can devote to development.

“Debt service is absorbing a rising share of public resources,” the bank said, adding that the crowding-out effect becomes particularly severe when debt-service obligations are compared with social spending.

According to the report, 25 of the 51 African countries with available data spent more on external-debt interest payments than on healthcare between 2021 and 2023.

Nigeria and Ghana were identified among the West African economies where external debt-interest payments rivalled or exceeded public health expenditure as a proportion of GDP.

The development raises concerns over the sustainability of fiscal strategies that rely heavily on borrowing to finance budget deficits, particularly where borrowed funds are not generating sufficient economic returns to offset future repayment obligations.

The AfDB said the deterioration in debt-service capacity has been driven partly by weak revenue mobilisation, noting that the proportion of government revenue devoted to external debt service across Africa increased from 23.7 per cent in 2017 to 31 per cent in 2024.

The pressure has also increased across several West African economies.

Cabo Verde’s external debt service as a share of government revenue rose from an average of 10 per cent between 2015 and 2019 to 16.7 per cent between 2020 and 2023, while Benin recorded a similar increase from 7.7 per cent to 16.5 per cent over the same periods.

The trend means governments are increasingly having to choose between servicing existing obligations and creating fiscal room for new investments in roads, power, healthcare, education and other productive assets.

For Nigeria, the challenge is particularly important because the country has historically operated with a relatively low revenue-to-GDP ratio, meaning that even moderate increases in debt-service costs can consume a disproportionate share of government income.

Beyond the immediate fiscal pressure, the AfDB warned that excessive public borrowing can have broader implications for economic productivity.

The bank estimated that a one per cent increase in public debt is associated with a 4.9 per cent decline in labour productivity and a 4.6 per cent decline in total factor productivity.

It attributed the relationship partly to the diversion of public resources towards interest payments at the expense of infrastructure, social services and institutions.

Heavy government borrowing can also raise financing costs for businesses as governments compete with the private sector for available domestic capital, potentially discouraging investment and weakening economic expansion.

Nigeria’s Q1 2026 debt-service figures demonstrate the changing structure of the country’s fiscal burden.

While external debt service declined by nearly one-third year-on-year to $954.06 million, domestic debt service rose by more than one-fifth to N3.14 trillion.

The divergence reflects the increasing importance of domestic borrowing in Nigeria’s debt-servicing equation and the relatively high interest rates attached to naira-denominated government securities.

The pressure is significant because domestic debt service is paid from naira revenues, while the government must also manage foreign-exchange risks associated with external obligations.

This creates a dual fiscal challenge: higher domestic interest costs consume government revenue, while exchange-rate movements can increase the naira value of external debt obligations.

Nigeria has embarked on several fiscal and revenue reforms aimed at improving government income and reducing dependence on borrowing, including an overhaul of the tax system, efforts to expand the formal tax base and measures to improve revenue collection by government agencies.

However, the AfDB’s assessment suggests that higher revenue mobilisation must be accompanied by stronger debt management and more efficient public spending if Nigeria is to translate additional revenue into development.

The challenge is therefore no longer simply how much government can borrow, but whether the economy can generate enough revenue and growth from borrowed funds to justify the cost of servicing them.

The AfDB’s warning comes against the backdrop of relatively strong economic growth in West Africa, which expanded by about 4.8 per cent in 2025 despite elevated public debt levels.

Nigeria’s public debt had risen above N152 trillion, while Ghana continued to manage the consequences of its debt restructuring programme.

Côte d’Ivoire and Senegal have also remained engaged with multilateral lenders, including the International Monetary Fund and World Bank, as governments seek to stabilise their fiscal positions.

The AfDB’s message is clear: stronger growth alone will not resolve the region’s debt problem.