2026 Projections: The 2026 Appropriation Bill, presented by President Bola Tinubu in December 2025, projects debt servicing costs at ₦15.52 trillion. Other government estimates range between ₦15.52 trillion and ₦15.91 trillion, which accounts for approximately 27% to 29.2% of the total ₦58.18 trillion budget.
2025 Actual/Revised Data: For the 2025 fiscal year, the federal government initially allocated approximately ₦14.32 trillion to ₦15.81 trillion for debt servicing. In the first seven months of 2025 (January–July), the government actually spent ₦9.81 trillion on debt servicing.
Context for the ₦25 Trillion Figure: The ₦25 trillion figure does not match current debt service projections. However, Capital Expenditure for the 2026 budget is estimated at roughly ₦25.68 trillion to ₦26.08 trillion. It is possible the ₦25 trillion figure is being confused with the capital investment allocation rather than debt servicing.
While debt servicing costs have risen significantly—up nearly 300% from ₦3.98 trillion in 2022—they have not reached the ₦25 trillion mark.
We apparently analyse general macroeconomic framework in Nigeria.Does it make sense for federal government to borrow its own money from central bank at atrocious interest rate?what is the best alternative
In January 2026, Nigeria’s macroeconomic framework is at a critical juncture, transitioning from aggressive stabilization to a growth-focused phase following several years of high-intensity reforms.
General Macroeconomic Framework (2026)
The current framework is characterized by "managed complexity" as the government attempts to balance fiscal consolidation with the need for growth.
Economic Growth: GDP growth is projected between 4.2% and 4.49% for 2026, supported by improved oil production (targeted at 1.7–1.8 mbpd) and new refining capacity.
Inflation & Interest Rates: Inflation has moderated to approximately 14.45% as of late 2025. Consequently, the Central Bank of Nigeria (CBN) is expected to cut the Monetary Policy Rate (MPR) from its 2025 peak of 27% to roughly 22%–24% during 2026.
Currency Stability: The Naira has stabilized within a band of ₦1,400–₦1,500/$, bolstered by foreign reserves reaching a 7-year high of approximately $47–$51 billion.
Fiscal Position: The 2026 Federal Budget of ₦58.18 trillion carries a significant deficit of ₦23.85 trillion (4.28% of GDP), highlighting continued reliance on borrowing despite rising revenues.
Borrowing from the Central Bank: "Ways and Means"
Borrowing from the Central Bank (known as Ways and Means Advances) at high interest rates is widely considered a sub-optimal and potentially damaging fiscal practice.
Why it happens: It serves as a lender-of-last-resort facility to cover short-term revenue shortfalls. However, in previous years, it became a permanent funding tool, leading to "fiscal dominance" over monetary policy.
Why high rates are "atrocious": When the government borrows from the CBN at high rates, it creates a circular debt trap. High interest payments on these loans increase the budget deficit, which then requires more borrowing to service.
Macroeconomic Impact: Excessive use of this facility is highly inflationary, as it directly increases the money supply without a corresponding increase in productivity, further devaluing the currency.
Best Alternatives for Financing
To move away from inflationary central bank borrowing, experts and the current administration are prioritizing more sustainable alternatives:
Revenue Mobilization (Tax Reform): The 2026 National Tax Acts aim to broaden the tax net through digitization rather than higher rates, targeting a revenue-to-GDP ratio increase towards 18%.
Asset Utilization & Privatization: Selling or concessioning underperforming government-owned assets (such as refineries or real estate) to raise immediate capital and reduce the maintenance burden.
Domestic Bond Markets: Issuing long-term Federal Government Bonds to the public and institutional investors (pension funds). This absorbs excess liquidity from the system rather than creating new money.
Equity Financing: Inviting private equity participation in strategic infrastructure (roads, power, rail) through Public-Private Partnerships (PPPs) to reduce the direct funding burden on the federal budget.
Concessional External Borrowing: Seeking low-interest loans from multilateral institutions (World Bank, IMF, AfDB) that come with technical support and much lower debt-servicing costs than domestic commercial rates.
When in 2013 attempt was made to convert matured short term debts into long term debt at the atrocious interest rate of 17 percent abandoning then $32 b.reserves as a means of liquidating debt.MRR stood at 13% compared to 2 to 3% in advanced economies.Whereas government had 4trillion naira idle funds sitting with banks yet still returns to same banks to borrow its own money.Does it make sense to say they're also using the benchmark 17 percent to drive the bond market at such exorbitant rate growing the cost of funds?
The scenario you described accurately reflects a period of significant fiscal and monetary distortion in Nigeria's history (roughly 2011–2015), which laid the groundwork for the modern debt challenges seen in 2026.
The practice of the government borrowing its own money from banks was a central inefficiency prior to the full implementation of the Treasury Single Account (TSA).
Idle Funds: Before 2015, different Ministries, Departments, and Agencies (MDAs) held over ₦4 trillion across thousands of commercial bank accounts.
The Cycle: Banks would use these interest-free government deposits to buy high-yield government bonds and Treasury bills. In effect, the government was paying "atrocious" interest rates to borrow its own liquidity back from the private sector.
Impact: This created a "lazy bank" model where commercial banks had no incentive to lend to the real sector (SMEs), as they could earn guaranteed double-digit returns from government securities.
The use of high interest rates (like the 17% mentioned) as a benchmark was a deliberate, albeit expensive, strategy by the Central Bank of Nigeria (CBN) and the Debt Management Office (DMO).
Driving the Bond Market: High yields were used to establish a benchmark yield curve to attract both domestic and foreign portfolio investors.
MPR vs. Market Rates: While the Monetary Policy Rate (MPR) was often around 12%–13% in 2013, market rates for long-term bonds frequently soared higher to compensate for inflation and "perceived risk".
Cost of Funds: Using a 17% benchmark significantly grew the cost of debt servicing. By 2026, this legacy of high-interest domestic debt has contributed to debt servicing now consuming a massive portion of the federal budget (projected at ₦15.52 trillion for 2026).
3. Why Reserves Weren't Used to Liquidate Debt
The decision to maintain external reserves (which stood at $47.88 billion in early 2013) instead of using them to pay down domestic debt was based on two main factors:
Currency Stability: Reserves are primarily used to defend the value of the Naira and ensure the country can pay for critical imports. Using them to pay domestic debt (in Naira) would have required "printing" Naira to buy the Dollars from the reserve, which would have been highly inflationary.
Credit Rating: Higher reserves improve a country's creditworthiness in international markets, allowing for cheaper "Eurobond" issuances, which Nigeria began successfully in 2013 at much lower rates (5.1%–6.3%) compared to domestic rates.
Conclusion
It does make sense to say that the government used high benchmarks to "drive" the market, but the primary victims were the taxpayers. This framework essentially transferred public funds to the banking sector via interest payments. The TSA was eventually fully implemented to end this "borrowing own money" cycle, though the high-interest-rate environment remains a tool for managing inflation as of 2026.
1. The Borrowing Paradox (The "Lazy Bank" Model)
2. Interest Rate Benchmarks (17% vs. Global Standards)
continue
As of January 2026, the legacy of high interest rates as a market driver remains a central theme in Nigeria's macroeconomic strategy, though the context has shifted toward inflation control and attracting foreign investment.
1. High Benchmarks as a Monetary Tool
The use of exorbitant rates (such as the current Monetary Policy Rate of 27% in early 2026) is no longer just about driving the bond market; it is a tool for monetary tightening.
Yield Curve Impact: The 10-year government bond yield recently hit an all-time high of 22.12%. This "exorbitant" rate acts as a benchmark that keeps the cost of funds high across the entire economy, discouraging private sector borrowing while rewarding domestic and foreign portfolio investors (FPIs).
Portfolio Inflows: High interest rates are deliberately maintained to provide a "yield premium" that attracts FPIs—projected to exceed $20 billion by the end of 2026—which helps stabilize the Naira and bolster foreign reserves toward a target of $51 billion.
2. Ending the "Borrowing Own Money" Loop
The specific 2013-era inefficiency of borrowing idle government funds back from banks has been largely mitigated by the Treasury Single Account (TSA).
Visibility and Control: As of January 1, 2026, a new Revenue Optimisation Platform (RevOps) has been rolled out to integrate all federal revenue mechanisms directly into the TSA. This ensures that royalties, taxes, and fees are immediately available to the government, reducing the need for the "short-term borrowing" from commercial banks that was prevalent in 2013.
Remaining Inefficiency: Despite the TSA, the government still faces a massive ₦23.85 trillion deficit in the 2026 budget. To bridge this gap, it plans to secure ₦17.88 trillion in new borrowings, which will likely be sourced from the same domestic bond markets where yields are currently at historic highs.
3. Consequences of High Debt Servicing
The cost of using these high benchmarks to fund the government is evident in the 2026 budget aggregates:
Revenue Absorption: Debt servicing is projected to consume ₦15.52 trillion (approx. 27% to 29% of the total budget).
Fiscal Squeeze: This represents about 45% of every Naira earned by the federal government (based on projected revenue of ₦34.33 trillion).
Crowding Out: High interest rates on government bonds make it difficult for businesses to compete for credit. In response, the government has directed the release of some Cash Reserve Ratio (CRR) funds specifically for lending to critical sectors at capped rates of no more than 20% to mitigate the impact of the high benchmark.
The "Best" Alternative in 2026
The administration’s current strategy focuses on Revenue-Led Consolidation as the primary alternative to borrowing at high rates:
Tax Expansion: Implementing the Nigeria Tax Act 2025 to raise the revenue-to-GDP ratio.
Asset Monetization: Transitioning toward a $1 trillion GDP target by 2026 through privatization and the new $10 billion Nigeria National Heritage Fund to reduce direct borrowing needs.
Concessional Loans: Prioritizing low-interest multilateral loans over high-interest domestic bonds where possible to lower the average cost of debt.
In January 2026, Nigeria’s macroeconomic framework is defined by a "Budget of Consolidation" that aims to transition the country from stabilization to growth, though it remains heavily burdened by debt.
1. Macroeconomic Context (January 2026)
The 2026 Federal Budget of ₦58.18 trillion (or up to ₦58.47 trillion in some estimates) reflects a significant fiscal expansion from previous years.
Revenue vs. Expenditure: The government expects to earn ₦34.33 trillion, leaving a deficit of ₦23.85 trillion (4.28% of GDP).
Debt Servicing: The allocation for debt servicing is ₦15.52 trillion. While high, this is significantly lower than the ₦25 trillion figure mentioned in your initial query.
Monetary Stance: The Central Bank of Nigeria (CBN) maintains a high benchmark Monetary Policy Rate (MPR) of 27% to combat inflation, which moderated to 14.45% by late 2025.
2. The Use of "Atrocious" Interest Rates
The decision to set high benchmarks—like the 17% for bonds or the 27% MPR—is a deliberate tool to manage two competing pressures:
Driving the Bond Market: High interest rates are used to attract domestic and foreign investors to fund the massive budget deficit. Without these high yields, the government would struggle to find buyers for its debt in a high-inflation environment.
The Cost of Funds: As you noted, this does grow the cost of funds for the entire economy. High government bond yields (currently between 16.8% and 22.1% for various maturities) act as a "floor" for all other interest rates, making it expensive for private businesses to borrow and grow.
3. Borrowing from the Central Bank
Borrowing from the CBN via "Ways and Means" remains a contentious practice. In 2026, the government is under pressure to reduce this, as it is viewed as a primary driver of inflation and currency devaluation.
Is it logical? Economically, borrowing from the central bank at high rates is often criticized as "robbing Peter to pay Paul." The government pays high interest to its own bank, which then remits its "profits" back to the government, but the process creates excess money supply that fuels inflation.
4. Best Alternatives to High-Interest Borrowing
To break this cycle, the 2026 framework prioritizes several alternatives:
Asset Monetization: Utilizing the Nigeria National Heritage Fund to unlock value from state assets (like refineries or real estate) rather than taking on new debt.
Equity over Debt: Moving toward Public-Private Partnerships (PPPs) for infrastructure, where the private sector provides the capital in exchange for operational rights, removing the funding burden from the federal budget.
Tax Reform without Rate Hikes: The Nigeria Tax Act 2025 focuses on digitizing collections and broadening the tax base to increase the revenue-to-GDP ratio without increasing the tax burden on existing taxpayers.
Concessional Financing: Actively seeking low-interest loans from multilateral institutions (World Bank, AfDB) which typically offer rates far below the 17%–22% found in the domestic bond market.
In January 2026, Nigeria’s macroeconomic framework continues to grapple with the structural consequences of using high interest rates as a primary fiscal and monetary driver.
The "Benchmark" Trap and the Cost of Funds
You correctly observed that using high benchmarks to "drive" the bond market effectively grows the cost of funds for the entire economy. In 2026, this manifests in several ways:
The 17% Legacy: The 2013 decision to benchmark long-term debt at high rates (e.g., 17%) set a precedent where the government competes with the private sector for capital. By 2026, government bond yields have reached even higher levels, with some maturities peaking at 22.1% to attract investors amidst ongoing deficit financing.
Crowding Out the Private Sector: When the government offers "exorbitant" guaranteed returns on bonds, commercial banks prefer lending to the state (the "lazy bank" model) rather than to businesses. For manufacturers and SMEs in 2026, this means interest rates on loans often exceed 30%, effectively stifling industrial growth.
Debt Service Rigidity: This high-interest environment has created a "fiscal chokehold." In the 2026 budget, debt servicing alone is projected to consume ₦15.52 trillion, which is roughly 45% of every Naira earned by the federal government.
Sustainability and the 2026 Strategy
To mitigate these pressures, the government has adopted a Medium-Term Debt Management Strategy (2024–2027) aimed at capping the debt-to-GDP ratio at 60% by 2027. Key components of the current framework include:
Monetary Easing Projections: As inflation moderated to 14.45% in late 2025, the Central Bank is projected to reduce the Monetary Policy Rate (MPR) from 27% toward a range of 22%–24% during 2026 to lower borrowing costs.
Revenue-to-Debt Shift: The focus has shifted toward Revenue Optimisation to reduce the ₦23.85 trillion deficit. Non-oil revenues now account for roughly two-thirds of total receipts, confirming a structural shift away from oil dependence.
The Best Alternatives Moving Forward
Experts and current policy documents highlight four superior alternatives to high-interest domestic borrowing:
Concessional Multilateral Loans: Prioritizing loans from the World Bank or AfDB, which offer significantly lower rates and longer moratoriums compared to the 20%+ rates in the domestic market.
Asset-Backed Securities & Privatization: Utilizing the Nigeria National Heritage Fund to monetize state assets, raising capital without adding to the interest-bearing debt stock.
Public-Private Partnerships (PPPs): Shifting the burden of major infrastructure projects—like the Lagos-Calabar superhighway—to private investors to reduce direct federal spending and borrowing needs.
Diaspora and Green Bonds: Tapping into specialized markets that offer more favorable terms or align with global sustainability funds, reducing reliance on traditional high-yield commercial bonds.
In January 2026, Nigeria’s macroeconomic framework is marked by fiscal consolidation—an attempt to transition from rescue mode into a sustainable growth phase.
The Current Macroeconomic Snapshot (2026)
Budget Aggregates: The 2026 Federal Budget (the "Budget of Consolidation") stands at ₦58.18 trillion.
Fiscal Deficit: A projected deficit of ₦23.85 trillion (4.28% of GDP) remains, with plans to borrow approximately ₦17.88 trillion domestically and externally to fund it.
Debt Servicing Reality: Debt servicing is projected at ₦15.52 trillion, accounting for 45% of total revenue and 26.7% of total expenditure.
Interest Rate Environment: The Central Bank (CBN) is expected to maintain its Monetary Policy Rate (MPR) above 22% for much of 2026, though some analysts predict a cautious reduction as inflation moderates toward 12.9%.
Analysis: Borrowing from the Central Bank
Borrowing from the Central Bank (Ways and Means) at high interest rates is widely viewed as a distorted fiscal strategy.
Circular Debt: Paying "atrocious" rates to the central bank essentially involves the government paying itself interest. While this nominally "returns" to the treasury as CBN dividends, it creates a massive liquidity injection (inflationary) without corresponding productivity.
Cost of Funds: Using high interest rates to drive the bond market—where long-term yields have reached 22.1% in 2026—sets a benchmark that crowds out the private sector. Banks prefer lending to the government (guaranteed high yield) over lending to businesses, which currently face loan rates often exceeding 30%.
The Best Alternatives for 2026
To move away from this high-interest debt trap, the following alternatives are being prioritized:
Revenue Mobilization (Tax Reform): The 2026 National Tax Acts aim to broaden the tax base and digitize collection, targeting an increase in the revenue-to-GDP ratio towards 18% to reduce the need for borrowing.
Asset Monetization: Utilizing the Nigeria National Heritage Fund to unlock value from state-owned assets (like refineries or underutilized real estate), raising non-debt capital for infrastructure.
Public-Private Partnerships (PPP): Shifting from "government-funded" to "government-enabled" infrastructure. For example, large-scale transport and power projects are being concessioned to private investors to avoid direct budget impact.
Equity over Debt: Encouraging foreign and domestic equity investments into productive sectors (agriculture and manufacturing) rather than relying on high-yield portfolio inflows (debt).
Concessional Multilateral Loans: Actively replacing high-interest domestic bonds with lower-rate, long-term loans from institutions like the World Bank and AfDB.
Direct Real Sector Lending: The 2026 policy includes releasing 20–25% of Cash Reserve Ratio (CRR) funds specifically for banks to lend to manufacturing and agriculture at rates capped at 20%, bypassing the high bond market.
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