States across Nigeria are increasing borrowing despite a sharp rise in revenues from the Federation Account Allocation Committee (FAAC), raising fresh concerns about fiscal sustainability and the efficient utilisation of public resources. FAAC allocations have surged by 161 per cent over the past three years, climbing from ₦2.8 trillion in 2022 to ₦7.3 trillion in 2025, yet state governments continue to accumulate debt at a pace that worries analysts and multilateral partners.
After falling from ₦5.8 trillion in late 2023 to ₦3.8 trillion by March 2025, states’ domestic debt has begun rising again, reaching ₦4 trillion by September 2025. External debt also increased to $4.81 billion over the same period. Lagos, Rivers, and Delta remain among the most indebted states, reflecting both their larger economies and higher borrowing capacity. However, the renewed borrowing trend extends beyond these traditional heavyweights, suggesting systemic pressures affecting subnational finances across the federation.
Analysts attribute the renewed borrowing to growing expenditure pressures that are outpacing revenue gains. State governments face higher wage bills following minimum wage adjustments, increased infrastructure spending to meet campaign commitments, and rising recurrent costs driven by inflation. While FAAC allocations have grown substantially, much of that growth has been absorbed by statutory obligations, leaving limited room for discretionary spending or debt reduction.
The structural weakness in state finances lies in internally generated revenue. Despite years of rhetoric about improving IGR, states collectively generate just 26 per cent of their total revenues from internal sources. This heavy reliance on federal allocations exposes states to oil price volatility and policy shifts at the centre, while limiting their ability to respond to local development priorities. Experts warn that without significant improvements in IGR, states will remain trapped in a cycle of dependency and debt.
The fiscal implications extend beyond state balance sheets. Rising state debt increases Nigeria’s overall public debt stock, affects the country’s risk profile with credit rating agencies, and competes for domestic liquidity that could otherwise support private sector lending. The Debt Management Office has consistently warned about the sustainability of subnational debt, particularly when borrowed funds are directed toward recurrent expenditure rather than productive capital investment.
For investors, state-level fiscal health matters for infrastructure projects, public-private partnerships, and the overall business environment. States with unsustainable debt profiles may struggle to service obligations, delaying payments to contractors and suppliers. The current borrowing trend, if unchecked, could undermine the fiscal consolidation gains achieved at the federal level and complicate Nigeria’s broader economic stabilisation efforts.
