The Looming Crisis: Government Spending and Debt in Nigeria and Africa

Government spending and debt have emerged as critical challenges across the African continent, with particularly alarming trends in Nigeria. As nations strive for development and economic growth, the accumulation of unsustainable debt levels threatens to trigger widespread financial crisis. This article examines how excessive government spending and mounting debt burdens are creating vulnerabilities within African financial systems, with a specific focus on Nigeria’s economic landscape.

The relationship between government bonds, banking stability, and economic health reveals a concerning pattern: what is often considered a “safe” investment may become the catalyst for the next financial crisis. By analyzing current debt trajectories, banking exposure to government securities, and the limits of sustainable fiscal policy, we can better understand the risks facing African economies and the steps needed to avert disaster.

The Current Debt Landscape in Africa

Africa’s public debt has grown dramatically over the past decade, reaching USD 1.8 trillion in 2022. This debt accumulation has outpaced GDP growth by approximately four times in dollar terms since 2010, reflecting the continent’s struggle with developmental needs, economic shocks, and reliance on external financing.

In Nigeria, the situation has become particularly acute. According to the National Bureau of Statistics National Bureau of Statistics, the country’s public debt stock stood at N121.67 trillion (US$91.46 billion) in Q1 2024, marking a 24.99% increase from N97.34 trillion in Q4 2023. The debt-to-GDP ratio reached 53.8% as of September 2024, up from 52.8% in the previous quarter.

Other African nations face similarly challenging circumstances:

• Eritrea reported a staggering debt-to-GDP ratio of nearly 164% in 2022
• Cabo Verde followed at 127%
• Mozambique’s ratio stood at 104%

The composition of African debt has also shifted significantly, with private creditors now accounting for over 43% of external debt, up from just 13% in 2010. This shift has increased borrowing costs and complicated debt restructuring efforts across the continent.

Banking Vulnerability: The Government Bond Connection

A key vulnerability in African financial systems lies in banks’ extensive exposure to government bonds. These securities are typically considered low-risk investments due to favorable regulatory treatment and the perceived safety of sovereign debt. In Nigeria, Federal Government of Nigeria (FGN) bonds are regularly issued to finance fiscal deficits and are actively traded on stock exchanges, with banks participating in both primary auctions and secondary markets.

This exposure has grown significantly, with reports indicating that African banks’ domestic sovereign debt holdings increased from 10.3% in 2010 to 17.5% in 2023. This growing reliance on government securities creates a dangerous interconnection between sovereign debt and banking system health.

Research suggests that while government debt securities can positively impact bank profitability in the long run, they may have negative effects if they include less conventional instruments or if bond markets experience corrections. In Nigeria, where 10-year government bonds yielded approximately 19.07% as of February 2025, any sudden decline in bond values could severely impact bank balance sheets, triggering systemic risks throughout the economy.

The phenomenon mirrors patterns seen in global financial crises of 2008, where assets previously considered “safe” suddenly become sources of instability. When government bonds lose value due to fiscal challenges, banks holding these securities face liquidity issues that can cascade throughout the financial system.

Exceeding the Limits: Economic, Fiscal, and Inflationary Thresholds

Governments face three fundamental limits to debt sustainability, all of which appear to have been exceeded by many African nations, including Nigeria:

• Economic Limit

Rising public deficits and debt eventually cease to stimulate growth and instead become economic hindrances. In Nigeria, evidence suggests that every new dollar of debt generates less than 60 cents of nominal GDP growth, indicating diminishing returns on public spending. This “crowding-out” effect reduces private sector investment, ultimately stifling productivity and job creation.

• Fiscal Limit

Increased taxation burdens productive sectors and often generates lower-than-expected revenue, revealing the inherent inefficiency of extracting resources from the private economy. In Nigeria, despite the government’s attempts to extract more from taxpayers, citizens already bear high out-of-pocket expenditures.

The allocation of resources to debt servicing, which consumed 29% of Nigeria’s 2023 national budget, dwarfs investments in critical sectors like education (8%) and health (5%), highlighting the counterproductive nature of this approach.

• Inflationary Limit

Expanded currency printing and government spending create persistent inflation, eroding purchasing power and making citizens poorer. In West Africa, inflation surged to 20.4% in 2023 from 8.2% in 2019, driven by higher interest rates and portfolio outflows. This inflation erodes real returns on previously purchased bonds, leading to solvency problems throughout the financial system.

Most developed African nations have exceeded these limits, yet governments remain reluctant to cut spending, perpetuating a dangerous cycle of debt accumulation.

The Political Dimension: Distorting Market Incentives

Perhaps the most surprising aspect of this emerging crisis is the significant role of political decisions in distorting market incentives, leading to unsustainable debt levels. Government bonds are often treated as “no-risk” investments requiring minimal capital backing, creating artificial incentives for banks to prioritize these securities over lending to the private sector.

This regulatory framework leads banks to divert resources toward government securities rather than productive economic activities. During times of economic stress, banks often rebalance their portfolios toward public assets perceived as safer, further reducing credit growth to the private sector.

Government meddling in the economy has led to crippling interest rates in Nigeria, stifling investment in essential infrastructure. By artificially propping up bond markets, the government has created a false sense of stability, masking its own insolvency and setting the stage for a devastating economic crisis.

Here’s a rewritten version with a focus on free market solutions and reduced government intervention:

The Path Forward: Embracing Market Freedom

To prevent an impending financial crisis in Africa, particularly Nigeria, policymakers must adopt a new approach: one that prioritizes market freedom and minimizes government intervention.

The current path of excessive government spending and debt accumulation is unsustainable. Instead, policymakers should:

1. Reduce government spending: Curb unnecessary expenditures and let the private sector drive economic growth.
2. Eliminate distortive regulations: Remove bureaucratic hurdles that stifle entrepreneurship and innovation.
3. Promote private investment: Encourage domestic and foreign investment to stimulate economic growth.
4. Allow interest rates to be determined by market forces, rather than government decree.

By embracing market freedom and reducing government intervention, African economies can:

The choice is clear: continue down the path of government-dominated economics or embark on a new journey of market freedom and pro