Nigerian states return to borrowing despite FAAC windfall

…Domestic borrowing hits N4trn
…FAAC allocations jump 161% in three years, IGR lags

States across Nigeria are ramping up borrowing despite a surge in allocations from the Federation Account Allocation Committee (FAAC), which has risen by 161 percent in the past three years, raising concerns about fiscal sustainability and the slow pace of growth in Internally Generated Revenue (IGR).

New data indicate a reversal of a year-long trend of fiscal consolidation that had initially seen debt stocks plummet.

A BusinessDay analysis of state domestic debt profiles, as published by the National Bureau of Statistics (NBS), indicated an aggressive descent from N5.8 trillion recorded in December 2023 to a low of N3.8 trillion in March 2025. However, the report for 2025 shows that the aggregate debt profile of Nigeria’s 36 states and FCT has begun to climb again, hitting N4 trillion by September 2025.

States with the highest domestic debt profiles as of September 2025 include Lagos (N1.04 trillion), Rivers (N381 billion), Delta (N247 billion), Enugu (N194.7 billion), and Ogun (N168 billion).

On the external front, the states’ debt profile rose from $4.349 billion to $4.811 billion as of June 2025. Lagos State also led this category with $1.049 billion in total external debt, followed by Kaduna ($658 million), Edo ($337 million), Ogun ($214 million), and Cross River ($201 million).

The resurgence of borrowing comes amid a continued rise in the monthly federal allocations disbursed to state governments since the inception of the Tinubu-led administration.

The NBS report on FAAC disbursements showed that states shared N2.80 trillion in 2022, before the current administration. However, BusinessDay analysis shows that disbursements have continued on a steady rise, reaching N3.53 trillion in 2023, N5.27 trillion in 2024, and N7.315 trillion in 2025—representing a 161 percent increase from the amount shared in 2022.

Speaking with BusinessDay, Ishaq Ibrahim, an Abuja-based economist, said that despite the significant increase in statutory allocations, states have been unable or unwilling to fund their ambitions solely through their increased share of the Federation Account.

He noted that the N200 billion expansion in debt between March and September 2025 suggests that the “easy gains” of fiscal reform may have been exhausted.

“While the initial drop to N3.8 trillion was hailed as a sign of improved fiscal health, the current uptick points to a growing mismatch between record revenues and escalating state expenditures,” Ibrahim said.

He added that while the federal government has encouraged states to invest windfalls in productive sectors to cushion the effect of reforms, the return to borrowing suggests many states remain stuck in a cycle of deficit financing.

Ibrahim suggested that the implementation of the new minimum wage and the skyrocketing cost of infrastructure projects may be the primary drivers forcing states back into the credit market.

“This revenue-debt paradox raises urgent questions about fiscal discipline, as surging inflows intended to provide a social safety net are increasingly swallowed by rising debt-servicing costs and a renewed appetite for commercial loans,” he added.

Also commenting on the trend, Uzor Joseph, economic expert and Executive Director at Frontline Investments, noted that the upward debt trajectory underscores an urgent mandate for states to aggressively expand their internally generated revenue (IGR) bases.

He explained that long-term solvency hinges on a state’s ability to mobilise revenues internally by effectively leveraging natural resource endowments, technology, public-private partnerships, human capital, and effective consequence management.

“This capacity is crucial for financing essential infrastructure, investing in human capital development, meeting the new minimum wage and its consequential adjustments, and repairing the fractured social contract,” Joseph said.

“To achieve debt sustainability, states must also curb their reliance on foreign loans—especially in light of exchange rate volatility—to minimise exposure to unfavourable rates. Additionally, states should establish robust frameworks for transparency, ensuring borrowed funds are allocated to high-impact projects with clear economic returns,” he said.

Also, BusinessDay’s analysis of states’ revenue performance report for the first half of 2025 (January to June) published by Agora policy, showed that 30 out of 36 states generated N6.05 trillion revenue, representing 87 percent of the total revenue (N6.95 trillion) target for the period.

Of the total N6.05 trillion realised in the period, FAAC allocations accounted for N4.46 trillion (73.8 percent) while the internally generated revenue was N1.59 trillion (26.2 percent).

The report showed that of the 30 states reviewed in the report, FAAC disbursement accounted for 70 – 95 percent of the total revenues of 29 states. Only Lagos state had FAAC allocations representing 30 percent of its total revenue.

According to the report, Lagos state generated the highest revenue in the first half of 2025 at N1.28 trillion, as against N1.46 trillion budgeted. Of this revenue, 70.1 percent was internally generated, and 28.9 was FAAC allocations.

Lagos state was followed by Akwa Ibom with a total revenue of N579 billion, higher than N415 billion budgeted in the period. 90 percent of the total revenue posted was from FAAC while only 10 was generated internally.

Bayelsa and Edo states followed as the third and fourth states with the highest total revenue in the period, as their revenues stood at N291 billion and N264 billion, respectively.

“Akwa Ibom, Lagos, and Edo topped the list of states that received more FAAC revenue than projected, while Osun, Zamfara, and Kaduna recorded the highest shortfalls compared to their FAAC projections.

“11 states generated more IGR than projected in their budgets, while 19 fell short of their IGR targets. Among the 11 states that exceeded their IGR targets, Akwa Ibom, Cross River, and Ekiti ranked highest, while Jigawa, Taraba, and Sokoto were the lowest performers among the 19 states that fell short of their targets,” the report stated. (BusinessDay)