External debt obligations of Nigeria’s 36 states and the Federal Capital Territory (FCT) increased by a combined $944.12 million in 2025, underscoring mounting fiscal pressures at the subnational level amid a volatile macroeconomic backdrop.
Data from the Debt Management Office (DMO), shows that the rise reflects continued reliance on foreign borrowing to bridge budget shortfalls, fund infrastructure projects, and manage liquidity constraints.
External debt refers to loans sourced from foreign creditors, typically denominated in hard currencies such as the US dollar, exposing borrowers to exchange rate risks.
The increase comes at a time when Nigeria’s currency has faced persistent volatility, amplifying the cost of servicing foreign-denominated debt. A weaker naira raises repayment obligations in local currency terms, tightening already strained state finances.
For many subnational governments, debt servicing now competes directly with essential spending on salaries, healthcare, and infrastructure.Analysts note that while external borrowing can provide cheaper, longer-tenor financing compared with domestic debt, it carries significant risks when foreign exchange earnings are limited.
Unlike the federal government, most states have minimal direct access to foreign currency inflows, relying heavily on federally allocated revenues and internally generated revenue (IGR), both of which remain under pressure.“The sustainability question is becoming more pressing,” said a Lagos based public finance analyst. “States are borrowing in dollars but earning in naira, which creates a structural mismatch that could worsen if currency pressures persist.”
The latest figures also highlight uneven borrowing patterns across states, with some aggressively tapping multilateral and bilateral lenders for development financing, while others remain more conservative. Projects tied to infrastructure, healthcare, and education have been key drivers of external loan uptake, often supported by institutions such as the World Bank and African Development Bank.
However, rising debt levels have reignited concerns about transparency, fiscal discipline, and project efficiency. Economists argue that without strong revenue growth and prudent debt management, states risk slipping into unsustainable debt cycles.From a broader economic perspective, the increase in subnational external debt adds to Nigeria’s overall public debt burden, which has been climbing steadily in recent years.
While federal authorities maintain that debt levels remain within manageable thresholds, the composition of that debt and the growing exposure to foreign currency liabilities has become a focal point for investors and credit rating agencies.
Experts say states will need to prioritise revenue diversification, improve tax collection efficiency, and adopt stricter borrowing frameworks. Failure to do so could limit fiscal flexibility and heighten vulnerability to external shocks, particularly in an environment of uncertain global financial conditions and domestic economic reform.
