Nigeria’s economy is facing a growing risk of a liquidity gap, with abundant cash circulating within financial markets while productive sectors remain neglected, thereby slowing growth in the real sector, distorting asset prices and weakening the transmission of monetary policy.

The widening gap between financial asset expansion and real sector activity raises fears of dire consequences of misallocated capital and subdued credit to critical sector businesses, as well as a possible entrenched speculative behaviour that could trigger a financial asset bubble.

The medium impacts of the uneven capital allocation, experts have warned, could include a spike in unemployment, exclusive output growth and heightened economic instability.

This growing mismatch is underscored by the outcome of the Treasury Bill auctions held on February 4.

The auction revealed the sheer scale of excess liquidity in the system, with investor demand overwhelming supply, particularly at the long end of the curve, as the 364-day bill attracted subscriptions of about N4.4 trillion against an offer of just N800 billion.

Despite the massive oversubscription, the stop rate on the one-year bill dropped sharply to 16.99 per cent from 18.47 per cent at the previous auction, reflecting aggressive bidding and expectations that yields may continue to soften.

By contrast, the 91-day and 182-day bills recorded relatively modest demand, with slight increases in stop rates, suggesting tighter pricing at the short end and more cautious liquidity positioning.

Beyond the headline figures, the auction results point to both overt and less visible sources of liquidity flooding the financial system.

Operators said the rush into longer-dated, risk-free government paper highlighted a strong preference for safety and yield certainty over riskier private sector investments. While the government benefits from cheap domestic credit, the persistence of excess liquidity alongside weak real sector signals deep structural bottlenecks.

Manufacturing, agriculture and small businesses continue to face credit constraints, limiting job creation and output growth. Sadly, the surplus cash is finding refuge in financial assets, raising the risk of asset price inflation and bubbles, particularly in equities and fixed income markets.

Operators pointed out that the February treasury bill auction goes beyond a routine government funding exercise, portraying an economy awash with liquidity but hampered by weak monetary transmission into productive sectors.

They noted that the outcome of the auction underscored the urgent need for policy measures to de-risk the real sector to effectively channel excess funds away from risk-free instruments and into real sector investment.

According to market operators, failure to address the imbalance could leave Nigeria trapped in a cycle where liquidity remains abundant but economic growth stays subdued, while financial markets continue to expand faster than underlying real economic activity.

Banks have prioritised risk-free investments. In 2024, for instance, publicly quoted banks earned a total of N5.93 trillion from investment in securities. The figure was 40 per cent of income on interest on credit, which should be their primary activity.

Credit to the private sector has remained volatile. As of December, the figure recorded a three per cent year-on-year decline, sliding from N78.02 trillion in December 2024 to N75.83 trillion.

Within the same period, credit to the government jumped by 26 per cent to N34.22 trillion at the close of last year. It was N27.14 trillion a year earlier.

About 10 years ago, credit to the government was a little above 20 per cent of what was extended to the private sector. The gap has narrowed since then to a ratio of 1:2.

As of January, Stanbic IBTC Bank Nigeria Purchasing Managers’ Index (PMI) indicated that Nigeria’s manufacturing sector experienced a slowdown, with the manufacturing business performance index dropping to 105.8 points, down from 112 points in December 2025.

The data noted that the overall private sector contracted for the first time in a year, dropping to 49.7 from 53.5 in December 2025.

In the face of a private sector credit squeeze, the public debt space has been active. In November 2025 alone, the Debt Management Office (DMO) sold treasury bills valued at N1.6 trillion, representing a month-on-month increase of 59.54 per cent or N610.67 billion, compared with N1.02 trillion sold in October 2025.

Data from the FMDQ Securities Exchange Financial Markets Monthly Report showed that sales of FGN bonds also rose markedly, with N589.52 billion issued in November, up 86.1 percent or N272.75 billion from N316.77 billion recorded in the preceding month.

According to the report, demand for sovereign securities remained robust. Treasury bills and FGN bonds were oversubscribed by 82.88 per cent and 42.88 per cent, respectively, in the month.

Founder of the Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, warned that the economy may not record any meaningful growth as the current structure of financial flows is adverse and detrimental to the growth of the manufacturing sector and the larger economy.

He pointed out that the growing reliance on government securities is a clear signal of market failure, stressing that the real sector requires long-term funding at single-digit interest rates to survive and expand.

According to him, investment flows in the economy are being dominated by institutional players, particularly pension fund administrators, whose assets have grown to over N25 trillion and are largely parked in low-risk instruments such as treasury bills and government bonds.

Yusuf observed that commercial banks, which should ordinarily play a central role in financing the real sector, are also channelling funds into the same government securities as they shy away from high-risk lending.

He argued that risk-averse behaviour is not limited to institutions, with households also increasingly choosing treasury bills over investments in manufacturing and services.

Yusuf lamented that the real sector has become unattractive because of elevated borrowing costs, with businesses operating on thin margins being asked to pay interest rates of about 30 per cent, describing it as unsustainable and partly responsible for the rising level of non-performing loans (NPLs).

He noted that the situation is particularly worse for small and medium-scale enterprises, which are often classified as high risk and are unable to meet stringent collateral requirements, including bank guarantees.

Yusuf stated that many SMEs are being forced into the unfair debt market where they borrow from microfinance banks at rates as high as about five per cent monthly (which is about 80 per cent when compounded).

He warned that such exorbitant borrowing costs place severe strain on small businesses, leading many to struggle and eventually collapse, thereby undermining economic growth and job creation.

“Banks find it more convenient to invest in government bonds and Treasury bills offering returns of around 16 per cent with little or no risk, a trend that is crowding out private sector borrowers, particularly manufacturers and farmers,” he said.

He urged the development finance institutions, such as the Bank of Industry, Bank of Agriculture, Development Bank of Nigeria and the Nigeria Export-Import Bank, to step up to bridge the funding gap.

Yusuf also expressed concern that many real sector operators complain of securing approvals from the institutions that end up not disbursing funds, raising questions about their capacity and capitalisation.

Executive Director of Halo Capital Management Limited, Dr Paul Uzum, said Nigeria was gradually transitioning from a prolonged period of elevated interest rates to a lower-rate environment, in line with the steady moderation in inflation. He explained that the shift has altered the behaviour of both the government and investors in the financial markets.

According to him, the Federal Government has become increasingly reluctant to mop up excess liquidity from the money market at elevated interest rates, preferring to wait for more favourable borrowing conditions.

“At the same time, investors are resisting lower yields on fixed-income instruments, creating a mismatch between available funds and acceptable returns.”

Uzum noted that the imbalance has pushed investors to seek alternative outlets for surplus liquidity, with the stock market emerging as a major beneficiary.

He, however, warned that the influx of funds into equities is inflating prices beyond fundamental valuations, raising the risk of a bubble as several stocks are now trading above their intrinsic value.

He added that the situation may be temporary, pointing out that the Federal Government still plans to borrow as much as N24 trillion to finance the 2026 budget deficit. Over time, he said, the excess liquidity would be absorbed as government borrowing resumes.

Chief Executive Officer of Arthur Stevens Asset Management Limited, Olatunde Amolegbe, attributed the strong demand for government securities to a combination of factors, including the sharp rise in Federation Accounts Allocation Committee (FAAC) disbursements, large volumes of cash released from maturing fixed-income instruments and increasing inflows from foreign portfolio investors.

He noted that the inflows have significantly boosted system liquidity, intensifying competition for risk-free assets.

He admitted that part of the excess liquidity has also filtered into the equities market, supporting the recent rally and driving year-to-date gains of nearly eight per cent.

Amolegbe, however, dismissed concerns about an asset bubble, arguing that current market performance does not yet reflect the excesses typically associated with speculative overheating.