Nigeria’s unsustainable debt
On 18 December 2024, the President presented the 2025 Budget which is a record N49.74 trillion, a 41.9% increase from the previous year, tagged 'The Restoration Budget: Securing Peace, Rebuilding Prosperity’, in preparation for the 2025 fiscal year.
Nigeria's 2025 budget has allocated its highest-ever figure to debt servicing. This alarming development comes as debt servicing continues to claim a significant portion of government revenue.
This calls into question Nigeria's revenue to debt servicing ratio and whether Nigeria's debt profile can be sustained. Despite claims by the current administration that Nigeria’s revenue-to-debt ratio has improved, dropping from 90% to 64% since the beginning of its tenure.
Nigeria faces the prospect of ongoing fiscal difficulties and a diminished ability to invest in economic growth and the welfare of its citizens if strong steps are not taken to dramatically increase revenues through diversification and reforms.
This situation arises as the burden of debt servicing and sinking funds have reached their highest levels in five years.
In the 2025 proposed budget, ₦14.2 trillion is allocated for recurrent expenditure, marking a 20.34% increase compared to N11.8 trillion in the 2024 budget. The capital expenditure is estimated at ₦13.6 trillion, a 3% increase from the capital allocation in the 2024 budget.
Additionally, proposed debt servicing is set at ₦15.4 trillion, while ₦4.3 trillion is earmarked for statutory transfers. These figures represent significant increases of 85.5% and 152.94%, respectively, compared to their allocations in the 2024 budget, with debt servicing constituting a larger proportion.
When debt becomes unsustainable
The revenue-to-debt service ratio is a critical metric that measures how much of a country’s revenue is consumed by debt repayments.
A worrying upward trend in recent years has reflected in Nigeria’s debt service to revenue ratio reflecting increasing fiscal stress and declining government capacity to manage its financial obligations effectively.
The sharp rise in 2023 and 2024, surpassing 100%, means Nigeria has been spending more on debt servicing than it earns in revenue. This implies that the country is borrowing to finance development and recurrent expenditures and meet its debt repayment obligations, a classic signal of unsustainable fiscal practices.
Nigeria's credit risk profile deteriorates as debt servicing increases, which raises interest rates on subsequent borrowings. A vicious cycle of growing debt is thus produced.
National budgets typically include debt servicing, but in order to maintain fiscal sustainability, the amount of debt service must stay within reasonable bounds. International standards provide guidelines for safe levels: the World Bank advises a debt service-to-revenue ratio of 22.5% is recommended.
These benchmarks have continuously been surpassed by Nigeria's debt service-to-revenue ratio, indicating a concerning fiscal imbalance. Nigeria's ratio, for example, hit a startling 110% in 2023, indicating that the government spent more money on debt repayment than it brought in.
This number not only deviates from the suggested standards but also reflects the severity of the financial burden, which leaves little money for investments in infrastructure, healthcare, and education, all vital public services.
The Stock Exchange in 2024
The Nigerian Stock Market (NGX) began the year on a very good note, with the All Share Index (ASI) reaching 104230.73 by the 8th of January 2025, reflecting a carryover of the confidence from the performance of the market at the end of 2024.
According to NGX, “the NGX ASI gained by 61.91 basis points or 0.06% to close at 103,648.24 basis points with the year-to-date returns settling at 0.7%.”
Although the performance of the NGX in 2024 was positive, the growth rate was modest. This indicates that the market is steady and has a potential for further growth if authorities implement supportive economic policies to boost investors' confidence.
The estimated total inflow in the Nigerian market between January and November 2024 was N2.5 trillion. This was an increase of 109% compared to the total inflow in 2023. This inflow was largely driven by domestic investors, which accounted for 84% of the total transactions carried out within the same time period.
An analysis of sectors by NGX showed investors invested more in the financial and insurance companies, which recorded significant profits.
The NGX insurance index recorded the highest gain at the end of 2024 business year, with most listed firms in this segment reporting positive earnings for the year, while the NGX consumer goods index recorded the poorest performance in 2024.
Insurance companies like Sunu Assurance and Veritas Kapital Assurance were among the top 10 companies with the best year-to-date performance in NGX in 2024.
The top 3 companies with the best year-to-date performance were Juli, Sunu Assurance and Oando. Juli Plc experienced the most substantial price appreciation in 2024, with its share price surging from ₦0.59 in January to ₦10.30 by December, reflecting a remarkable growth rate. Similarly, Sunu Assurance saw its share price climb from ₦1.21 in January to ₦10.75 by year-end, while Oando recorded a significant increase from ₦10.85 to ₦66 over the same period.
The consumer goods sector experienced the most significant declines in 2024, driven by rising inflation and currency devaluation. These macroeconomic pressures increased production costs and reduced consumer purchasing power, negatively affecting the sector's profitability and investors’ confidence.
The CEO of Arthur Stevens Asset Management, Olatunde Amolegbe, anticipates moderate growth for the NGX in 2025, supported by the government's efforts to consolidate economic reforms. He also projected an increase in foreign portfolio investment inflows, driven by sustained exchange rate stability and improved macroeconomic conditions.
Statista projects that the market capitalisation of the NGX will reach US$57.41 billion in 2025, with an annual growth rate of 1.1%. Also, they project that the volume of trade will reach US$3.36 billion in 2025.