Introduction

Nigeria’s external debt burden is poised to escalate significantly as the naira continues its sharp depreciation against the US dollar. Economic analysts warn that the prolonged slide of the local currency will increase the cost of servicing foreign debts, adding pressure to the country’s fiscal position and raising concerns over long-term economic sustainability.

A recent report by Price WaterhouseCoopers (PwC) titled “2025 Nigeria Budget and Economic Outlook” highlights the grave risks of continued devaluation on Nigeria’s total debt obligations. The report emphasizes that the fluctuation in exchange rates will play a pivotal role in determining the country’s overall debt burden in 2025. As the naira weakens, Nigeria’s external debt stock—which is denominated in US dollars and other foreign currencies—becomes costlier to service, further stretching government resources.

While Nigeria’s financial markets saw some positive developments in 2024—such as the oversubscription of a $2.2 billion Eurobond—the nation remains highly vulnerable due to its increasing reliance on external borrowing, high inflation rates, and declining investor confidence.

How the Naira’s Devaluation is Worsening Nigeria’s Debt Crisis

Alarming Growth in External Debt

According to PwC, Nigeria’s external debt skyrocketed by 89.7% to ₦63.1 trillion in dollar terms by Q2 2024, compared to ₦54.31 trillion in Q2 2023. More concerning is the rise in external debt in naira terms, which jumped by 31.6% to ₦71.2 trillion, largely fueled by:

• Increased Federal Government borrowing, especially through bonds.
• The sharp depreciation of the naira, which fell by 47% from ₦770.38/$ in 2023 to ₦1,470.19/$ in 2024.
• Higher debt servicing costs, which eat into the country’s already strained revenue base.

The continuous devaluation of the naira means that Nigeria has to spend more naira to repay the same amount of dollar-denominated debt. This worsens the country’s fiscal deficit and puts additional strain on government spending.

Rising Debt Servicing Costs and Fiscal Constraints

Debt servicing is becoming an increasingly heavy burden on Nigeria’s national budget. In 2024 alone, Nigeria spent over 90% of its revenue servicing debt—a worrying statistic that raises questions about fiscal sustainability.

The 2025 budget outlook indicates that a significant portion of government earnings will still go toward interest payments on loans, leaving little room for critical infrastructure development, healthcare, and education.

If the naira continues its decline, the government may be forced to:

• Seek further external loans to meet its obligations.
• Introduce austerity measures, cutting back on social programs.
• Increase taxation, placing additional pressure on businesses and consumers.

The Broader Economic Impact of Naira Depreciation

Effect on Foreign Investments

One of the key risks identified in the PwC report is the potential difficulty Nigeria will face in attracting foreign investment if its currency remains volatile.

Despite significant capital inflows into the banking and manufacturing sectors in 2024—recording $579.48 billion and $624.71 billion, respectively—experts warn that negative real interest rates (where inflation exceeds interest rates) could deter international investors.

Foreign investors look for stability and profitability. If inflation rates in advanced economies remain low while Nigeria’s inflation stays high, global capital will shift to markets offering more stable returns.

Impact on Inflation and Cost of Living

Inflation in Nigeria hit 34.6% in November 2024, driven by:

• Higher import costs due to naira depreciation.
• Increased cost of goods and services, including fuel, food, and essential commodities.
• Monetary policy tightening by the Central Bank of Nigeria (CBN) to curb inflation.

Even though the CBN raised the Monetary Policy Rate (MPR) to 27.5%, liquidity management remains a significant challenge, making it difficult to achieve price stability.

The continued depreciation of the naira will:

• Further push up inflation, reducing the purchasing power of ordinary Nigerians.
• Make imported goods—including fuel, raw materials, and machinery—more expensive.
• Put pressure on businesses, leading to higher production costs and possible job losses.

Can Exchange Rates Stabilize in 2025?

CBN’s Role in Managing the Crisis

The Central Bank of Nigeria (CBN) has introduced several reforms aimed at stabilizing the exchange rate and boosting foreign exchange (FX) inflows. Some of these include:

1. Unifying exchange rates to reduce speculation and arbitrage.
2. Encouraging diaspora remittances by offering competitive exchange rates.
3. Implementing tighter monetary policies to control money supply growth.

Will These Measures Work?

PwC expresses cautious optimism that exchange rates could stabilize in 2025 if policy measures are properly implemented. However, it stresses that Nigeria must:

• Reduce dependence on oil revenue by diversifying into sectors like agriculture, technology, and manufacturing.
• Strengthen local production to cut down on excessive imports.
• Boost foreign reserves through improved exports and remittances.

Failure to implement these measures could lead to further devaluation, worsening the external debt crisis and economic instability.

The Road to Debt Sustainability: What Must Be Done?

Given the severe implications of rising external debt, Nigeria must take urgent action to stabilize the economy and restore investor confidence.

1. Diversify Revenue Sources

The over-reliance on oil exports continues to make Nigeria vulnerable to global price fluctuations. To achieve long-term economic stability, the government must:

• Expand non-oil revenue streams, such as taxation and agriculture.
• Support tech startups and industrialization to create sustainable economic growth.
• Attract foreign direct investments (FDIs) into new sectors.

2. Strengthen the Manufacturing Sector

A strong manufacturing sector can help:

• Reduce the need for imported goods, saving valuable foreign exchange.
• Create jobs and boost domestic productivity.
• Encourage local value addition, increasing export revenue.

3. Enhance Debt Management Policies

• Nigeria should prioritize concessional loans over expensive commercial borrowings.
• The government must negotiate better debt terms to reduce repayment pressures.
• A clear debt repayment strategy should be implemented to prevent further accumulation.

4. Implement Disciplined Monetary and Fiscal Policies

• The CBN must continue monitoring inflation and exchange rate dynamics.
• Fiscal discipline is needed to control excessive government borrowing.
• Encouraging private sector investment in infrastructure can help reduce dependence on loans.

Conclusion

Nigeria’s external debt crisis is set to worsen unless urgent measures are taken to stabilize the naira, diversify revenue sources, and attract long-term investments.

With external debt hitting ₦63.1 trillion and inflation at 34.6%, the country is at a critical juncture. Without decisive action, Nigeria risks slipping further into a debt trap, where debt servicing consumes nearly all government revenues.

The way forward requires bold reforms, disciplined economic policies, and a clear focus on sustainable growth. If Nigeria can effectively manage inflation, strengthen its currency, and reduce external borrowing, it may still regain economic stability and restore investor confidence in the years ahead.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

29^th January, 2025