Zero Equilibrium's Economic Review of the Current State of the Economy: Is Nigeria Headed into A Debt Trap as Effects of Fiscal Reforms Fade?
By Chinedu Okoye
Executive Summary:
Nigeria has achieved a measure of macroeconomic stabilization over the last 18–24 months, with improved FX liquidity stronger reserves, easing inflation, and a lower debt-to-revenue burden. But while the surface looks neat, the [real] economy beneath remains largely unchanged. Structural constraints or restraints remain and continue to restrict real sector activity, industrial capacity excluding Oil and Gas, has been stagnant, and productivity remains low.
This brief evaluates Nigeria’s FY2024–2025 macro trajectory using three lenses; first, macroeconomic indicators –inflation, reserves, debt metrics, tax capacity, second, sectoral performance – agriculture,, services, and oil industries, and thirdly, the Macro risk environment namely; FX fragility, potential debt rollover pressure, policy coherence - or lack of
ZE’s central finding that, though Nigeria has stabilized the headline indicators, fundamental indicators remain lacking and largely unchanged in effects. Growth remains concentrated, narrow, and with an over reliance on services with little to no emphasis on increasing production. The paper concludes by arguing that without a coordinated industrial strategy and deeper structural reforms, current gains will be short-lived, with the economy neck deep in debt.
1.0 Introduction:
A lot has been achieved by the President Bola Tinubu administration given the precarious and fragile economic conditions at the start of its tenure. With debt-to-GDP at all-time highs, FX availability scarce, and the Central Bank owing FX backlogs of about $7 billion, deep fiscal adjustments and an attempted policy reset helped stabilize the situation.
Debt-to-revenue fell from a projected 97% to about 68% within 12–15 months. The Naira was floated as the CBN abandoned the peg, but not before securing an FX buffer through the Afreximbank crude-for-cash (currency support) facility.
The Apex Bank then rolled out a series of policies to promote market-determined FX pricing, discourage hoarding, and capture more remittances. These helped ease inflationary pressures and supported the disinflation trend observed in headline CPI.
Consequently, gross FX reserves rose sharply from $34 billion to about $43 billion within two years (October 2023 to October 2025). S&P ratings have also improved to B for short-term government securities and B- for longer-term foreign-currency debt.
But have these improved macro indicators translated into meaningful economic growth? Have Nigeria’s structural impediments, which constrain key sector, been addressed?
The Zero Equilibrium (ZE) answer is no. The foundation of macro stability (lower debt burdens, improved FX liquidity, and stronger reserves) has been laid. But what remains missing is growth in strategic sectors essential for sustained output expansion (GDP) and rising incomes (GDP per capita). This is the core subject of this paper.
Section 2 discusses stalled growth arising from subdued expansion in key sectors. Section 3 compares oil and non-oil performance. Section 4 examines non-oil GDP constraints driven by weak industrial development. Section 5 highlights the elusiveness of foreign direct investment (FDI), with Nigeria’s FDI/FPI ratio at near-zero—according to a ZE source in a Lagos-based investment fund. Section 6 analyses industrial underperformance. Section 7 examines fiscal balance and debt dynamics before Section 8 introduces Nigeria’s emerging debt-overhang reality. Sections 9 and 10 discuss naira stability risks and the broader policy outlook. The paper concludes with ZE’s macro outlook and policy imperatives.
2.0 Growth Stalled by Subdued Growth in Key Strategic Sectors:
Material increases in overall GDP and sectoral performance remain weak. Without coherent plans to stimulate key sectors and support private investment, high single-digit GDP growth will remain elusive. Investment and economic activity in many non-oil subsectors continue to stall or expand only marginally.
(Contribution of Oil (red 🟥) accounting for 3.97% contribution to GDP and Non-oil (green 🟩 at 96.03%)
The non-oil sector, which accounts for 96.03% of total GDP, grew steadily through 2024, reaching ₦97 trillion by Q4, before momentum faltered to ₦96 trillion in Q1 2025. Conversely, oil GDP, though small at about 3.97% of total output, registered its first marginal uptick after four consecutive quarters of contraction.
In real terms, the non-oil sector has performed better, but the quality of growth remains poor—driven largely by services—while agriculture and industry continue to underperform. Services led growth from Q1 2024 to Q1 2025. Agriculture maintained a subdued contribution below 30%. Industry lagged further, averaging 19.9%.
This pattern reinforces the fragility of Nigeria’s growth structure: consumption-led, import-dependent, and minimally transformative. Without robust productivity gains in agriculture, manufacturing, and infrastructure, headline GDP growth will remain non-inclusive and vulnerable to shocks.
(Real Oil and Non-Oil year on year growth Q1 2024 to Q1 2025)
3.0 Oil v Non-Oil Sector Growth:
The Non-oil sector has fared better than the Oil sector in real terms as the latter has seen a sharp downward trend from Q2 2024, to Q1 2025, after a spike to ~10% growth. The Non-oil sector remains plagued by inflation and other costs as well as incoherent, appropriate, or consistent policies by the fiscal arm of the Federal Government – Finance, Trade, Agricultural, Ministries and agencies with specified industrial development mandates. The oil sector shares the plight in this regard.
Services, which is included in the Non-oil segment, led gains in the period(s) Q1 2024 through to Q1 2024.
Agriculture contribution to GDP stayed subdued under 30% coming a distant second, ith industry the lowest at 19.9% average contribution.
4.0 Non-Oil GDP Stalled by Weak Industrial Development:
The Non-Oil sector which includes Agriculture, Manufacturing/Industry, Services, etc being a bigger portion and contributor to overall GDP, has seen warm growth with key inflationary sectors (Agric and Industry) continually stalled.
The non-oil sector remains constrained by persistent inflation, elevated production costs, and inconsistent fiscal policies from ministries responsible for finance, trade, agriculture, and industrial development. The oil sector also suffers from similar policy inconsistencies.
Services (classified under non-oil) led gains across Q1 2024 to Q1 2025. Agriculture’s contribution stayed below 30%, and industry was the weakest performer at about 19.9%.
The reasons include the absence of a clear, actionable plan to boost agricultural productivity, and limited support for industry in a tight monetary environment exacerbated by weak fiscal incentives.
As a result, services continue to drive GDP, but even their growth has not expanded meaningfully.
5.0 Foreign direct investments Remain Elusive:
Efforts to attract local and foreign investment have mostly yielded Memoranda of Understanding (MoUs) with little real impact. As a result, output in key industries remain stagnant or growing at a slow pace.
External [investment] inflows have been dominated by foreign portfolio investments (FPIs) seeking yield in Treasury Bills and bonds, instead of long-term productive ventures. ZE analysts see this as a sign of Nigeria’s vulnerability as short-term debt from local and forign temporarily boost FX supply and support the naira, but these flows are inherently volatile and quick to reverse under global tightening or domestic uncertainty.
6.0 Industry Underperformance and Challenges:
Agriculture: Output remains low, keeping prices elevated.
Key challenges include:
6.10 Insecurity: Farmer-herder clashes in the northern food-producing belt continue to discourage farming and suppress output.
6.11 High input costs: Seeds, fertilisers, and imported machinery remain expensive.
6.12 Scale and skills deficits: Nigerian agriculture remains predominantly manual, far from global mechanised standards.
6.13 Capital constraints: Credit to the private sector rose from about N43 trillion to ~N74 trillion, but high interest rates and heavy government borrowing have crowded out private investment. Credit to the public sector stood at N23 trillion in April 2024.
6 14Trade balance: has been largely due to the reduced Importation of fuel, and weaker import volumes on goods and services trade - the later restricted.
7.0 Fiscal Balance and Debt:
An effect of the subsidy removal wasfiscal rebalancing – the creation of budgetary space, and this has been seen by the increased allocations to States; and the reduction of the high near 100% debt burdens seen two years ago.
As a resultif higher perceived risk premium and the monetary tightening, yields were heightened in 2024 December, to 22.252% (see chart 2 below). Before moderating to ~15% by the end of H1 2025 (June, 30. 2025), a sign of increasing confidence in the stability of the Naira and the federal government's capacity to pay.
But as pointed in our earlier Blog post, the debt burden reduction is less of a deleveraging and more of financial engineering. A great chunk of budgetary spending (fuel subsidies) were eliminated and more revenue raised in nominal terms.
However, Nigeria's total treasury bills outstanding as at H1 2025 stood at N12.6 trillion. And a Naira value of total debt at N149 trillion. The federal government has experienced heightened demand for NTBs by both local and foreign investors and this has given the Naira a much needed boost.But demand for NTBs from local and foreign investors, while helpful for the nairasignifies increased dependence on short-term debt.
In addition, efforts to ramp up internal revenue generation which has improved and yielded applaudable results, with the federal government reaching it's non-oil revenue months in advance for 2025.
Non-oil revenue performance has improved, inflation and exchange-rate depreciation continue to erode real disposable incomes.
Nigeria still runs a persistent fiscal deficit, creating pressure to borrow more. With rising debt servicing crowding-out capital expenditure, narrowing fiscal flexibility, pushing the economy toward a potential debt trap.
The fiscal balance has hinged on two factors: i) subsidy removal, revenue generation (oil and Non-Oil), and because the country runs a fiscal deficit, there is a tendency to lean towards more debt, and this in itself could lead to economic inefficiencies, and stated growth as more debt leads to ore debt servicing and a budgetary squeeze.
The Nigerian economy, is gradually approaching a debt trap and a deep debt overhang effects that could impede growth and fiscal sustainability.
8.0 The Debt Overhang Effect:
High debt-servicing costs crowd out both private investment and government capital spending. Despite improvements in headline ratios, interest payments and recurrent spending dominate the budget, leaving limited space for development projects.
The Nigerian economy is still faced a dual challenge: debt overhang and revenue insufficiency. As the “crowding-out” reduces the available funds to be chsnnekeked towards productive project. The country's weak infrastructure—both tangible (roads, energy, logistics) and intangible (institutions, regulatory clarity)—limits industrial development as businesses struggle to scale..
In a nutshell the Nigerian economy lacks in vital infrastructure that would be supportive of businesses and overall industrial development. These infrastructure as explained below are both tangible and intangible in nature.
Tangible Infrastructure: Development projects has been slow and ill-timed, 3rd mainland bridge maintenance, connecting railways, and refribising of already connected roads in construction and yet to be in construction should have taking precedent over the coastal road.
Sukuk bonds could have been used to finance these projects for the most part, and revenue generated from users (the public), used to offset principal and profit sharing obligations.
This is not to deny the fairly piece of financial engineering fine with the counterpart funding obligations and contractor financing to be recouped via tolls in the long run. However if the company runs into liquidity issues the project stalls.
9.0 The Fragility of the Naira Stability:
The naira is currently supported primarily by:
- crude oil receipts,
- diaspora remittances, and
-foreign portfolio inflows (FPs) a most volatile.
This is not to say that policy hasn't been a major factors as the Cardoso led CBN have implemented reforms that have; narrowed FX market arbitrage, enhanced transparency, and restored partial confidence. But with non-oil export revenues still minimal and the combination of; OPEC+ maintaining conservative for longer, subdued oil prices, and Nigeria unable to meet the capped quotas, FX inflows remain heavily dependent on a narrow sources listed above.
However, with other resource revenue not in play (yet), and with OPEC+ deciding to hold off on increases in production quotas, there is only so much Nigeria can amass from crude oil receipts.
Though a $43 billion strong (gross) foreign reserves is applaudable from the $34 billion two years ago(and ~$3 newr as opposed to the above $35 billion currently, it still only but covers 9-10 months of international transactions.
The currency stability is still determined by external factors including the federal reserve rate cut(s), which is a positive for NTBs, the glow of these foreign funds into the private sector remains abysmal. Hence the Naira strenght rests on fragile foundations.
10.0 Emerging Risks and Policy Outlook
The following are several factors ZE think-tank believes could hinder Nigeria’s macroeconomic outlook over the next 12–18 months;
- Poor Monetary-Fiscal Coordination: Monetary stability upheld by TBills, with the stability cones at a cost and with significant [rollover] risk exposure. It also constrains credit to the private sector, creating a drag on real investment and productivity.
- There are also debt sustainability concerns ad the government suffers a [Directional] Spending and [Capacity] Revenue problem: no proper scale of preferences are evident in the budgetary items, the spending needs to be on areas that improve Human Development and supports industrial development and growth. So far debt and other recurrent expenditures have crowded lu the budget. Absent revenue from other sources, the economy could once again approach the 90% Debt-to-Revenue range.
- FX Vulnerabilities: Any sharp decline in oil prices or capital inflows could reintroduce volatility, deplete reserves, and reignite inflationary pressures.
- Institutional and Policy Incoherence: The fragmented coordination among key ministries—Finance, Industry, Trade, and Agriculture—continues to blur Nigeria’s industrial development vision, deterring both local and foreign investors.
11.0. ZE Outlook and Remarks on Policy Imperatives:
Nigeria’s early reform gains have delivered macro stability, but not macro resilience. It has been a transition from crisis management to sustained growth requires more than fiscal tinkering. Nigerian economic growth demands a coherent strategy, one that links revenue mobilization, industrial policy, and infrastructure development
Without these, fiscal consolidation may remain slippery, andbnqcri gains basic, as the economy risks settling into a debt overhang trap characterized by high borrowing costs, weak private investment, and limited fiscal flexibility.
To avoid this path, the government must:
1. Reprioritize spending toward productive capital formation - preferably resource development extraction, development and revenue mobilization.
2. Deepen non-oil export capacity through incentives for manufacturing and agro-processing.
3. Reinforce and ecourage institutional coordination between fiscal and monetary authorities.
4. Develop credible medium-term debt management frameworks to curb refinancing risks.
Real macroeconomic stability serves as a means to structural transformation, it is not an end in itself. And so, the sustainability of Nigeria’s economic recovery will depend less on nominal indicators and more on the real sector’s capacity to expand, and by extension the economy's ability to diversify, and generate inclusive growth.
Comments
Post a Comment