States burn revenue windfall on overheads, debt servicing

Nigeria’s long-awaited revenue rebound is failing to translate into tangible development as many state governments channel new fiscal gains into growing overheads and debt servicing, a pattern that’s crowding out capital investments needed to spur growth.

Data from BudgIT’s ‘2025 State of States’ report shows that while combined revenue from the Federal Account Allocation Committee (FAAC) to 35 states surged by 110.74 percent to N11.38 trillion in one year and Internally Generated Revenue (IGR) jumped from N8.66 trillion in 2023 to N14.4 trillion in 2024, much of the windfall still gets absorbed by recurrent expenditures — particularly overheads, personnel costs, and public debt charges.

A more cursory look at the data shows that states’ spending on personnel rose 23.24 percent in 2024, with overhead costs increasing from N1.5 billion in 2023 to N2.44 trillion last year.  This pattern, analysts say, exposes a deepening fiscal imbalance in subnational finances, where governance costs rise faster than developmental spending.

“States are expected to increase and expand the quality and content of their capital infrastructure and general investments,” BudgIT wrote in its report.

Read also: Debt servicing gulped 61% of FG’s revenue from Jan-Sept 2024

“This is because the federal government can only do so much as the country practices federalism, meaning that a notable amount of responsibility is within the purview of the subnationals (land reform, energy provision, and local economic development).”

Matilda Adefalujo, an economics analyst at Lagos-based consultancy Meristem Research, argued that spending on capital investments is more of a ‘political willpower,’ noting that shortfalls in developmental projects may hinder measurable outcomes such as roads, healthcare, and job creation.

“A high-interest environment significantly increased the interest the states would be paying on loans. And I think the numbers should be lower in 2025,” Adefalujo said, urging the subnationals to prioritise capital spending, expand revenue brackets, and be more fiscally disciplined to allow the gains of the revenue increase to be felt by citizens.

Benue, Kogi, and Ogun illustrate the imbalance

Though capital expenditure saw a big leap, with total spending rising from N4.06 trillion two years ago to N7.63 trillion in the 2024 fiscal year, recurrent expenditure still dominated some states’ spending.

In Benue State, for instance, operating expenditure surged by 126.6 percent between 2023 and 2024, driven largely by interest payments and public debt charges.

The state recorded the highest operating expenses in the North-Central region, signaling mounting fiscal pressure despite increased federal transfers. The jump in Benue’s recurrent spending highlights how debt obligations are increasingly shaping state budget priorities.

Kogi State followed a similar path. Its overhead costs spiked 111.8 percent year-on-year, pushing overall operating expenditure up by 55.7 percent in 2024. The report noted that Kogi’s spending on health, education, and social protection continues to trail far behind allocations to general public services — a pattern that highlights the dominance of bureaucratic maintenance over citizen-focused investment.

Even in the South West, Ogun State, widely seen as fiscally disciplined, reflects the same imbalance. Despite allocating N150 billion to capital expenditure, recurrent costs still dominated the budget, accounting for 69.8 percent of total spending in 2024. The state’s heavy tilt towards recurrent outlays mirrors a nationwide trend, where growing operational costs threaten fiscal sustainability.

“Rising debt levels of the sub-national are the cause of the increase (in recurrent expenditure)  as a result of rising interest payments,” Tilewa Adebajo, CEO of CFG Advisory, said in a telephone chat, warning that states risk “social infrastructure underfunding” if the trend persists.

Data sourced from BudgIT further reveal that total debt for the 2023 fiscal year sat at N9.89 trillion but moved relatively minimally to N10.57 trillion in 2024, underscoring the impact of a firmer currency on foreign loans.

Read also: Federation transfers to states increase by 110.74% to N11.38trn in 2024 – CBN

The rare stability of the naira, which closed October at N1,421.7 per US dollar with a gain of N33.50, is tempering the debt levels of states even as Nigeria endures one of the world’s highest interest rates in the world at 27 percent.

For Tunde Abidoye, head of research at Lagos-based FBNQUEST Merchant Bank, the continued rise in recurrent expenditure is more driven by inflationary pressures that peaked at about 34.8 percent last December and an average exchange rate of N1,478/US$1 – a considerable change from the 2023 average of N899/$1.

Abidoye stressed that states risk “high fiscal deficits and a ramp up in debt levels” if recurrent expenditure continues to outpace capital spending at the subnational levels.

“Rising debt levels pose fiscal sustainability risks and narrow rhetorical fiscal space, resulting in a cycle of more borrowing,” he noted.