The additional cost of sovereign debt

The cost of borrowing

Every sovereign country has income and expenditure. While citizens are typically expected to balance their books, governments, particularly in developing economies, often grapple with persistent deficits driven by structural constraints, revenue shortfalls, or policy choices. As shown in an IMF June 2026 report on Nigeria, “The overall deficit of the consolidated government is estimated to have increased to 4.4 percent of GDP in 2025” (IMF, 2026). This, in addition to the 23% Monetary Policy Rate (MPR) of the Central Bank of Nigeria in September 2026, indicates strong monetary tightening actions that ultimately feed through to the cost of borrowing, to the point where even the best customers pay a prime lending rate of 19.04% (CBN, 2026a; CBN, 2026b).

To finance such a fiscal imbalance, sometimes a government may issue bonds. These bonds come with a coupon rate that is paid to the owner until a certain date when the principal is paid. Since these bonds are issued by a government, they are usually seen as risk-free compared to other assets issued by companies from that country. Therefore, they establish the domestic benchmark risk-free rate (RFR), which stood at an elevated 16.79% for a new 10-Year Sovereign Bond in September 2026 (DMO, 2026a). Crucially, a microscopic spread of just 20 bp between 12-year and 7-year maturities at the October 2026 auction demonstrates that even shorter sovereign maturities hold a near-identical premium yield exceeding 16.9% (DMO, 2026b).

This results in investment firms like those dealing in pensions or banks often moving in to acquire government bonds and gain what is a low-risk asset compared to other domestic options, especially in countries like Nigeria (PenCom, 2026).

Crowding out

Unfortunately, this creates higher risks of crowding out, as firms, especially small to medium-sized enterprises, face capital rationing, which can be especially damaging for farmers who require capital to purchase machinery to ensure productivity (IMF, 2026). This potential supply-side contraction relative to population growth risks increased scarcity that may result in a cost-push inflationary spiral, which will in turn lead to bondholders demanding higher rates to safeguard against it.

Brain drain

Another risk comes in the form of brain drain, as the lack of access to capital stifles private equity market liquidity for firms which, albeit risky, would have had enough capital to at least become large enough to sell shares. Instead, government bonds, which are safer, yet hold lower returns, are more attractive to pensioners who are more risk averse. This holds the risk of making the youth feel that they have no stake in the growth of the country, creating a greater likelihood of a brain drain. This culminates in a developing nation potentially losing its talented youths to competitors while also having to continuously service debt to the point that debt-servicing obligations crowd out critical public capital expenditure necessary to cultivate talent (IMF, 2026).

References

Central Bank of Nigeria (CBN) (2026a). Monetary Policy Decisions, 22 September 2026. MPC decisions.

Central Bank of Nigeria (CBN) (2026b). Money Market Indicators, September 2026. Monthly indicators.

Debt Management Office (DMO) (2026a). September 2026 FGN bond auction result, 14 September. Auction result.

Debt Management Office (DMO) (2026b). October 2026 FGN bond auction result, 19 October. Auction result.

International Monetary Fund (IMF) (2026). Nigeria: 2026 Article IV consultation, Country Report 26/125, press release, paragraphs 7 and 33, and Table 1, p.27. Article IV report.

National Pension Commission (PenCom) (2026). Unaudited report on pension funds industry portfolio for the period ended 31 August 2026. Portfolio report.