Nigeria’s need to borrow $2.8 billion or other enormous amounts of money is driven by long-standing, deep-rooted economic problems, which do indicate the country is in severe fiscal pain, despite the government’s contention that the overall situation is getting better.

The fundamental reason for the continuous borrowing is to allow the government to finance its annual budget deficit.

Nigeria has for a long time been unable to generate enough non-oil revenues (via taxes, etc.) to finance its spending. While tax-to-GDP ratios are slowly rising, they are low compared to peer countries.

Being a big oil producer, government revenue is heavily vulnerable to global oil price fluctuations and domestic production issues (like oil theft). Each time prices fall or production reduces, there is a massive revenue gap.

Yet, government expenditure, particularly on recurrent (day-to-day) items, has been high and, in the past, often out of balance with capital/infrastructure spending that would trigger long-term growth.

Nigeria has a massive infrastructure gap (roads, power, rail, etc.) to be plugged with gigantic capital spending. The majority of the borrowing, in addition to the domestic and foreign Sukuk bonds, is specifically aimed at funding major infrastructure projects. Since the cost cannot be funded by present government revenues, borrowing is the only practical solution available to invest in future economic growth.

As pointed out $1.12 billion is needed just to refinance a current Eurobond maturing in November 2025. This is normal practice by countries to avoid default all of a sudden, but it increases the stock of debt.

Previously, Nigeria has spent a very large percentage of its income servicing (paying the interest on) already incurred debt. While the current government claims to be reducing this percentage, debt servicing remains a huge drain on public funds, with insufficient funds for essential services like health and education.

Nigeria’s recent economic context, exacerbated by ambitious and difficult reforms, The removal of subsidy on petrol and the liberalization of the exchange rate, while welcomed by international bodies for setting the economy on a more sustainable path, led to a rise in inflation and currency devaluation in the short term.

Naira devaluation automatically raised the domestic currency cost of foreign debt servicing, as more Naira had to be used on dollar-denominated obligations.

Extremely high inflation, particularly food inflation, is the prime source of misery for the ordinary Nigerian, and it mounts pressure on the government to find money for social palliatives or critical services.

The huge borrowing is a consequence of decades of low revenues, oil reliance, and underinvestment, a risky fiscal position that the incumbent government is attempting to tackle using a mix of reforms and borrowing.

While the economic reforms are creating a foundation for long-term growth and stability (the “good news”), the standards of living and well-being of a significant majority of citizens are currently in “trouble” because the benefits have not yet realized in terms of better day-to-day living.