Foreign borrowing rises as 32 states, FCT got nearly $1

Nigeria's subnational debt burden deepened significantly in 2025 as 32 states and the Federal Capital Territory collectively accumulated **$944.12 million in fresh external borrowing**, according to the Debt Management Office (DMO). This surge underscores a critical fiscal challenge: as the federal government battles inflation and currency depreciation, state governments are turning to international capital markets to bridge infrastructure and operational gaps—a strategy laden with foreign exchange risk and debt-servicing vulnerability.

The 2025 borrowing wave reflects a structural pattern emerging across Nigeria's federation. States, starved of internally generated revenue (IGR) and facing declining federal allocations, are increasingly tapping Eurobond markets and bilateral lenders rather than seeking domestic credit. This external pivot concentrates currency risk at the state level—a problem amplified by the naira's sustained weakness (trading near 1,500+ to the USD in early 2025) and Nigeria's limited forex reserves relative to external obligations.

## Why Are Nigerian States Borrowing So Much Externally?

Federal allocations to states have stagnated in real terms as the central bank battles inflation and debt-service costs consume ~95% of federal revenue. States lack the fiscal instruments to generate sustainable IGR; most depend 85–90% on federal transfers. External borrowing offers an escape valve—cheaper initial rates than domestic markets, longer tenors, and access to hard currency for critical imports and infrastructure. However, this masks an uncomfortable truth: states are borrowing in USD to fund recurrent expenditure and low-ROI projects, not productivity-enhancing capital investment.

## What Are the Currency and Debt-Service Risks?

The $944M 2025 inflow is noise relative to the stock—but it's symptomatic. State external debt servicing obligations balloon when the naira depreciates. A state borrowing at 5–6% in USD faces an effective real cost of 15–20%+ when naira depreciation is factored in. At current forex scarcity, many states will struggle to service maturing obligations without federal bailouts (which create moral hazard) or further currency pressure. The DMO's capacity to monitor and regulate state borrowing is already stretched; decentralized borrowing decisions across 36 jurisdictions amplify systemic risk.

## Which States Are Most Exposed?

Lagos, Rivers, and Cross River states—traditional borrowers with access to international markets—likely account for 40–50% of the $944M. These states have development agendas and rated infrastructure, so they can access capital. But smaller states, unable to borrow internationally, remain reliant on federal lifelines or predatory domestic lenders, widening fiscal disparities and entrapping regions in poverty cycles.

**Market Implications for Investors:**
- **Currency hedging costs rise** for multinational corporates operating in high-borrowing states (Lagos, Rivers).
- **State bond spreads widen** as refinancing risk peaks in 2026–2027.
- **Infrastructure equity plays suffer** if states cannot service debt and suspend capex.
- **Federal liquidity tightens** if states demand emergency support, crowding out private-sector lending.

The 2025 borrowing surge is not cyclical—it's structural. Until states build genuine IGR capacity, external borrowing will remain a short-term painkiller masking deeper fiscal dysfunction.

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