Juliet Ezeh
Nigeria’s subnational governments are entering a troubling financial phase where rising revenues are no longer translating into reduced borrowing. Instead, states across the country have collectively expanded their external debt exposure by nearly $900 million within a single year, raising fresh concerns about fiscal discipline, long-term sustainability, and the effectiveness of recent economic gains.
A fresh analysis of debt statistics for 2025 shows that despite a significant increase in statutory allocations from the federation account, most states and the Federal Capital Territory continued to depend heavily on external loans. The trend highlights a widening gap between revenue growth and debt management strategies at the subnational level.
Rising revenues, rising debts
In 2025, state governments received a substantial boost in federal allocations, driven by improved oil revenues, exchange rate adjustments, and subsidy removal reforms that increased distributable income. However, instead of easing borrowing pressure, this financial windfall appears to have coincided with more aggressive external loan acquisition.
Collectively, states and the Federal Capital Territory increased their foreign debt stock from about $4.8 billion at the end of 2024 to approximately $5.68 billion by the end of 2025. This represents an increase of about $884 million in just twelve months.
Out of the 37 subnational entities, more than 30 recorded increases in their external debt portfolios, while only a handful managed to reduce their exposure. This imbalance suggests that the borrowing appetite remains widespread and deeply embedded in state fiscal strategies.
Borrowing outpacing repayment
A key concern emerging from the data is the scale at which new borrowing is outpacing debt reduction. While a few states managed to cut down their obligations slightly, the reductions were relatively small compared to the surge in new loans taken by others.
In total, increases in external debt across states amounted to over $940 million, while debt reductions accounted for just under $60 million. This means that for every dollar saved through repayment or restructuring, nearly sixteen dollars were added in new borrowing.
This imbalance raises questions about how effectively states are using improved revenue inflows and whether debt sustainability frameworks are being adequately enforced.
Growth fuelled by infrastructure ambition and fiscal pressure
State governments have consistently defended borrowing as a necessary tool for infrastructure development, especially in sectors such as roads, healthcare, water supply, and education. Many argue that federal allocations alone are insufficient to meet growing population demands and infrastructure gaps.
However, economic analysts warn that the pace and structure of borrowing may be creating long-term vulnerabilities rather than solving short-term funding challenges.
Much of the external debt is denominated in foreign currency, which exposes states to exchange rate risks. As the local currency weakens, repayment costs increase significantly, placing additional pressure on state finances.
Winners and heavy borrowers
The debt data reveals sharp differences in borrowing patterns across states. Some states recorded moderate increases, while others experienced explosive growth in their debt profiles.
A few states saw their external debt double within a single year, reflecting aggressive borrowing strategies. In several cases, debt levels rose by over 100 percent, particularly in states with large infrastructure ambitions or weaker internally generated revenue systems.
Conversely, a small number of states managed to reduce their external obligations. These states reportedly focused on repayment, restructuring, or limiting new borrowing. However, they remain the exception rather than the rule.
One of the most striking cases is the country’s largest economy at the subnational level, which recorded only marginal debt growth despite already holding the largest external debt stock in the country. This suggests a more cautious approach to new borrowing, even though absolute debt levels remain significantly high.
FAAC windfall not slowing borrowing
Perhaps the most surprising aspect of the trend is that higher federal allocations have not slowed down borrowing. In fact, the opposite appears to be happening.
States collectively received trillions of naira in federation account allocations in 2025, representing a sharp increase compared to the previous year. The boost was driven by improved oil receipts, currency devaluation effects, and subsidy removal savings.
Yet instead of using this fiscal space to reduce debt or strengthen internal revenue systems, many states appear to have expanded borrowing activities.
This has led analysts to question whether increased federal transfers are inadvertently reducing fiscal discipline at the subnational level.
Debt servicing eating into revenues
Another worrying development is the rising cost of debt servicing. States collectively spent hundreds of billions of naira in 2025 alone to service external loans, a significant increase compared to the previous year.
This means a larger portion of state revenues is now being diverted away from critical public services such as healthcare, education, and infrastructure maintenance.
With foreign loans denominated in dollars, currency depreciation has further worsened repayment burdens, forcing states to allocate more funds simply to stay current on obligations.
Economic experts warn of long-term risks
Economists and fiscal policy experts have expressed concern that the current trajectory could undermine long-term economic stability at the subnational level.
One major concern is that states are increasingly relying on borrowing instead of developing sustainable internally generated revenue systems. This creates a cycle where higher allocations from the federal government reduce urgency for tax reforms and revenue expansion efforts.
Another concern is debt accumulation without corresponding productive output. If borrowed funds are not effectively channeled into revenue-generating infrastructure, states may struggle to repay in the future without cutting essential services.
Analysts also warn that excessive borrowing could lead to “debt rigidity,” where a large share of future revenues becomes locked into repayment obligations, leaving little room for development planning or emergency response.
Structural weaknesses in fiscal management
A recurring theme in expert commentary is weak fiscal discipline and limited transparency in debt management across some states. While borrowing is not inherently negative, concerns arise when debt is accumulated without clear repayment strategies or measurable economic returns.
There are also fears that some states may be using borrowing to cover recurrent expenditures rather than capital projects, which is considered unsustainable in public finance.
This pattern, if left unchecked, could deepen fiscal stress and widen inequality in development outcomes across regions.
The road ahead: reform or risk
The current debt trajectory places Nigeria’s subnational governments at a critical crossroads. On one hand, borrowing can accelerate infrastructure development and stimulate economic growth if properly managed. On the other hand, unchecked debt expansion without strong revenue growth could lead to long-term fiscal distress.
Experts argue that states must urgently prioritize internal revenue generation, improve tax systems, reduce wasteful spending, and ensure that borrowed funds are directed toward projects with clear economic returns.
There is also growing consensus that stronger debt oversight mechanisms may be needed to ensure borrowing aligns with long-term fiscal sustainability goals.
Conclusion
Nigeria’s states are experiencing a paradoxical fiscal situation: rising revenues on one side, and rising debts on the other. Instead of easing financial pressure, improved allocations appear to be fueling a new wave of borrowing.
Without stronger discipline and strategic financial planning, the current debt trend risks turning short-term revenue gains into long-term fiscal liabilities.
The challenge ahead is not just about how much states can borrow, but how effectively they can manage what they already owe and whether they can shift from dependency on external loans to sustainable, internally driven growth.