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…Experts Warn Surging Domestic Borrowing Poses Massive Fiscal Risk
…Say Domestic Borrowing Surge Threatens Private Sector Lending
LAGOS – The Federal Government significantly ramped up its domestic borrowing programme in June, raising N1.2 trillion through the Debt Management Office (DMO) FGN bond auction, as investors sought higher returns amid mounting inflation concerns and expectations of prolonged tight monetary conditions.
Analysts said while the Federal Government successfully raised capital to plug its massive budget deficit, doing so at an 18%+ yield is highly expensive.
They noted that a significant chunk of future national revenue will now be eaten up just by paying interest on this N1.2 trillion debt, severely constraining the budget available for capital projects like roads, healthcare, and education.
Analysts have consistently warned that accelerating domestic borrowing to finance deficits poses a massive fiscal risk, noting that raising over a trillion naira at these premium rates leaves Nigeria with minimal fiscal buffers.
According to them, with risk-free government bonds offering guaranteed returns above 18%, commercial banks and institutional investors (like pension fund administrators) have very little incentive to lend to the private sector, noting that it is far safer and more lucrative for banks to pack their liquidity into FGN bonds than to take a gamble on businesses.
The analysts said because the government is borrowing at 18%, commercial banks will inevitably price their corporate loans much higher—often upwards of 28% to 32%. For local manufacturers, small businesses, and startups, borrowing at these rates makes expansion or even daily operations nearly impossible.
The June auction saw the DMO offer N1.2 trillion worth of bonds, double the N600 billion offered in May, underscoring the government’s increasing reliance on the domestic debt market to finance its widening fiscal deficit and meet funding obligations.
Investor appetite remained robust despite the larger issuance, with total subscriptions rising sharply to N1.4 trillion from N796.2 billion recorded at the previous auction.
The strong demand was largely driven by the recent upward movement in market yields, which has enhanced the attractiveness of fixed-income securities.
The auction featured two instruments—the January 2035 and April 2037 FGN bonds— with N600 billion offered on each tenor. Demand was broadly balanced across both maturities, reflecting sustained investor confidence in long-dated government securities.
According to DMO data, the January 2035 bond attracted subscriptions worth N705.2 billion, while N600.9 billion was allotted. Similarly, the April 2037 bond recorded subscriptions of N708.3 billion, with final allotment standing at N621 billion.
Despite the strong participation, the bid-to-cover ratio declined to 1.16 times from 1.30 times recorded in May, suggesting that while demand remained healthy, the significantly larger offer size diluted overall subscription coverage.
A key highlight of the auction was the sharp increase in stop rates across both maturities. The marginal rate on the January 2035 bond rose to 18.34 percent from 17.00 percent at the previous auction, while the April 2037 bond settled at 18.35 percent, compared to 17.04 percent previously.
Analysts attribute the rise in yields to renewed inflationary pressures, particularly those arising from energy-related cost shocks, which have heightened expectations that monetary authorities will maintain a restrictive policy stance for longer.
The higher rates also reflect investors’ demand for greater compensation in an environment of elevated inflation risks and fiscal uncertainties.
Market watchers note that the government’s growing financing needs continue to exert upward pressure on domestic borrowing costs. Nigeria’s fiscal deficit is estimated at about N23.9 trillion, with approximately N18.4 trillion expected to be financed through the domestic market.
This substantial funding requirement is expected to sustain a steady supply of government securities, providing continued support for elevated yields across the fixed-income market.
The latest auction further highlights the government’s deepening dependence on domestic debt as external financing conditions remain challenging.
While domestic borrowing offers a readily accessible funding source, analysts warn that sustained heavy issuance could crowd out private-sector borrowers and keep interest rates elevated.
So far in 2026, the DMO has raised approximately N4.8 trillion, including non-competitive allotments, putting it on course to surpass the N5 trillion raised in the entire 2025 fiscal year.
However, despite the impressive pace of fundraising, the government still faces a considerable financing gap if it is to meet its full-year borrowing target.
The pressure on yields is also evident in the secondary bond market, where investors have continued to reprice fixed-income assets in response to inflation concerns and expectations of prolonged monetary tightening.
Month-to-date, the average yield on FGN bonds has climbed by 75 basis points to 17.06 percent, reflecting the increasingly bearish sentiment across the debt market.
Analysts expect yields to remain elevated in the near term as investors closely monitor inflation trends, fiscal developments, and the Central Bank of Nigeria’s policy direction.
With the government expected to maintain an aggressive borrowing programme and inflation risks still looming, the bond market may continue to offer attractive returns to investors while increasing the cost of debt servicing for the government.
The June auction therefore signals a new phase in Nigeria’s debt market, where rising borrowing needs, inflationary pressures, and tighter liquidity conditions are combining to push interest rates higher even as investor demand for government securities remains resilient.
