Nigeria’s debt challenge has deepened further as new data from BudgIT revealed that the total subnational debt ( comprising the obligations of Nigeria’s 36 states and the Federal Capital Territory ) has surged to ₦10.57 trillion as of mid-2025. This represents a 6.8 percent increase from ₦9.89 trillion recorded the previous year, raising urgent concerns about the sustainability of public finances and the growing strain on internally generated revenue (IGR) across most states.
The report, published on October 29, 2025, shows that over half of Nigeria’s states now dedicate more than 70 percent of their monthly federal allocations to servicing debts or recurrent expenditure. This marks a worrisome trend where debt accumulation is no longer primarily tied to productive investment but to routine government operations and wage obligations.
At the top of the debt ladder are Lagos, Kaduna, Rivers, Ogun, and Cross River states—jointly accounting for more than 35 percent of total subnational obligations. Lagos alone owes over ₦1.3 trillion, most of which is domestic borrowing for infrastructure projects and external loans tied to transport and housing development. In contrast, smaller states like Jigawa, Yobe, and Zamfara maintain relatively low debt profiles but also exhibit weak fiscal independence, heavily reliant on monthly allocations from the Federation Account Allocation Committee (FAAC).
Economists argue that while some borrowing may be justified to fund growth-inducing projects, the composition of state debt is particularly troubling. According to data from the Debt Management Office (DMO), nearly 65 percent of subnational borrowing in Nigeria between 2020 and 2025 went toward consumption expenditure, recurrent commitments, or non-revenue-generating projects. The result is a widening fiscal gap with limited capacity for debt repayment outside federal transfers.
The Roots of the Fiscal Imbalance
Nigeria’s fiscal decentralisation system contributes heavily to the problem. While the federal government controls the bulk of revenue sources, state governments are constitutionally limited in taxation powers. This imbalance creates a dependency structure where most states rely on FAAC disbursements for over 80 percent of their budgets.
When oil prices fluctuate or production declines, as witnessed throughout 2024 and early 2025, FAAC allocations fall sharply. States then turn to domestic borrowing, often through banks and bond markets, to bridge budgetary gaps. This cycle repeats annually, locking many states into chronic debt servicing positions without meaningful increases in local productivity.
Furthermore, the 2023–2024 inflation surge (peaking above 30 percent) has eroded the real value of federal transfers, forcing states to borrow more simply to maintain existing wage structures and administrative operations.
Debt and Governance Accountability
Fiscal transparency remains another critical dimension. BudgIT’s analysis found that 19 states failed to publish full audited financial statements for the last fiscal year, while 11 states provided incomplete debt registers. This opacity hinders accountability and raises questions about the true scale of obligations, especially those incurred through local bond issues and short-term bank overdrafts.
Observers note that while the federal government has implemented frameworks like the Fiscal Responsibility Act (FRA) and State Fiscal Transparency, Accountability and Sustainability (SFTAS) program, enforcement remains inconsistent. The expiration of the World Bank-backed SFTAS incentives in 2024 also removed a key motivation for states to maintain transparent reporting standards.
Socio-Economic Implications
The debt burden is more than a technical fiscal issue, it has direct consequences for citizens. In many states, heavy debt service obligations have squeezed funds available for education, healthcare, and infrastructure maintenance. Recurrent arrears in salary payments and pension obligations have re-emerged, particularly in northern states such as Kogi, Taraba, and Bauchi.
In states with higher exposure, debt repayments often crowd out capital expenditure. Lagos, for instance, allocates roughly ₦180 billion annually to debt service-almost equivalent to its entire education budget. Meanwhile, smaller states like Benue and Ekiti report capital spending ratios below 20 percent, well below the 40 percent threshold recommended for developmental sustainability.
A Fragile Federation
The implications extend beyond economics. Fiscal instability at the subnational level undermines Nigeria’s federal structure by widening inequality between states. Wealthier states such as Lagos, Rivers, and Ogun leverage higher IGR and access to credit markets, while poorer states become increasingly dependent on bailouts or emergency funding.
In recent months, several state governors have renewed calls for a restructuring of revenue allocation, arguing that the current system does not reflect regional needs or resource contributions. However, reform efforts have stalled amid political disagreements and fears of upsetting the delicate balance between oil-producing and non-producing regions.
Prospects for Reform
Experts recommend a multipronged approach to address the crisis. First, fiscal federalism must evolve to empower states with more meaningful revenue authority: particularly over natural resource exploitation, consumption taxes, and property levies. This would reduce over-dependence on FAAC and encourage states to pursue genuine economic diversification.
Second, borrowing frameworks require stricter discipline. The DMO has proposed revising state debt limits based on IGR capacity rather than arbitrary benchmarks. States unable to meet debt-service thresholds would be barred from new borrowing until compliance is restored.
Third, fiscal transparency should be institutionalised, not donor-driven. Independent budget monitoring agencies, mandatory debt disclosure, and civil-society oversight can help close the accountability gap.
Lastly, expenditure reform is essential. Nigeria’s public sector wage bill (both federal and state) has ballooned, leaving little fiscal room for investment. Without decisive cost-cutting and productivity-linked spending, debt will continue to rise regardless of revenue improvements.
Outlook
The rising subnational debt to ₦10.57 trillion underscores a fragile fiscal ecosystem in which both political and economic incentives reward short-term fixes over structural solutions. As Nigeria prepares its 2026 budget, the challenge will be to re-align fiscal governance across all tiers of government, ensuring that borrowing fuels growth rather than entrenching dependency.
Ultimately, Nigeria’s debt crisis is not merely about numbers, it reflects the deeper question of how the federation balances power, accountability, and prosperity. Without reform, today’s rising liabilities could evolve into tomorrow’s systemic collapse, with profound consequences for national stability and development.