‘States’ debt quietly undermining the economic stability of Nigeria threatening it’s stability’
By Ayeeshat J Ahmad
The Nigeria Extractive Industries Transparency Initiative (NEITI) has issued a policy-backed caution on what it describes as a “silent fiscal emergency” quietly undermining the economic stability of Nigeria’s states.
This alert follows the release of NEITI’s latest Policy Brief — “Beyond Federal Allocations: The Cost of Borrowings and Debt Servicing at State Level in Nigeria” — which provides fresh, evidence-based insights into how debt servicing obligations are constraining states’ capacity to fund essential services, local infrastructure, and poverty reduction initiatives.
The Policy Brief reveals that between 10% and 30% of monthly FAAC allocations in many states are directly deducted at source for debt servicing, leaving less room for grassroots development investment.
Daily Trust reports that Nigeria’s total public debt increased to N149.38 trillion in the first quarter (Q1) of 2025.
According to data from the debt management office, the country’s total public debt increased by N4.72 trillion or 3.3 percent compared to the N144.67 trillion recorded in the fourth quarter (Q4) of 2024.
While the federal government accounted for the bulk of the domestic debt, which was N74.88 trillion in the quarter under review — up from N70.40 trillion recorded in the previous quarter, domestic debt owed by states and FCT dropped to N3.86 trillion in March 2025, compared to the N3.96 trillion recorded in December 2024.
Kaduna, Ogun lead in debt deduction
Despite the reduction, the NEITI reports indicate debts by most states are still on the high side, eating deeply into their allocation, limiting their capacity to optimise their gross allocations.
Minister of Finance and Coordinating Minister of the Economy, Wale Edun had last week during a briefing on the state of economy said the administration has been increasing resources available to state governments for education, health, and infrastructure by repaying past deductions from the Federation Account.
“Since the first half of 2023, the combined fiscal balance of the states has grown from 1.8% of GDP to 3.1%. That’s from ₦2.8 trillion to over ₦7 trillion, 7.1 trillion Naira exactly, which is a surplus.
“This has given them greater capacity to invest, and from an economic classification standpoint, the increase in spending of the states has mainly gone to capital expenditure,” Edun had said.
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However, despite the increased allocation, their debt profile coupled with debt service obligation remains a concern.
According to the NEITI report, Kaduna State recorded the highest 2024 deduction ratio at 32.06%, translating to N51.2bn deducted from N159.7bn in gross allocations. Ogun State followed with 27% (N33bn from N123bn), Bauchi with 26% (N37bn from N142bn), and Cross River with 24% (N28bn from N119bn).
From the NEITI Policy Brief, these high-debt states contrast sharply with low-debt performers such as Borno with only 2.63% debt reduction obligations, Jigawa 2.74%, Benue -3.58% and Nasarawa -3.82%) debt burden exposure.
Other States with low debt burden commitments include Kebbi 4.06%, Bayelsa -4.46%, and Anambra 4.54%, where prudent borrowing and efficient fiscal management have preserved over 95% of gross allocations for direct development spending.
NEITI explained that the decision to undertake this research is rooted in its statutory mandate under the NEITI Act 2007 and in line with global EITI Standards, which require disclosures on revenue allocations and subnational transfers.
States in Nigeria receive substantial monthly allocations from the Federation Account, much of it derived from extractive revenues.
However, when between 10% and 30% of these allocations are deducted at source for debt servicing, the fiscal space for grassroots infrastructure, social services, and poverty alleviation is severely diminished.
By shedding light on the scale and implications of these deductions, NEITI is providing citizens, policymakers, and development partners with reliable evidence to drive fiscal discipline and prudent debt management.
The Initiative further noted that the study addresses a critical governance gap by complementing national debt management reforms with robust subnational fiscal transparency.
The report said high and unsustainable debt servicing obligations pose risks to state-level stability and undermine the developmental impact of extractive revenues. Through this disclosure, NEITI empowers citizens, civil society, and the media to hold state governments accountable for their borrowing decisions, while providing a credible, evidence-based platform for dialogue on debt sustainability thresholds, transparent loan agreements, and responsible economic governance.
The NEITI Policy Brief also examined Positive Debt-to-GDP Management implications and the lessons that subnational governments must consider.
NEITI notes that these low-debt states provide practical models for maintaining a healthy debt-to-GDP profile while still leveraging borrowing for development where necessary. This balance between debt and revenue is critical for preserving fiscal sovereignty and avoiding dependency on future bailouts.
Hidden liabilities and contractual risks
The Policy Brief also flags contractual obligations—notably in Ogun (N6bn) and Ondo (N7.73bn) tied to public-private partnerships (PPP) and infrastructure projects—warning that opaque contract terms and excessive deductions can undermine future fiscal space.
Conversely, 18 states, including Abia, Adamawa, and Akwa Ibom, reported zero contractual deductions, signaling more cautious or strategically timed borrowing.
Inequality in the revenue sharing formula
In 2024, Delta State received N581.27bn — five times the N108.32bn received by Nasarawa. NEITI warns that such disparities, compounded by high debt-servicing ratios in smaller-allocation states, could deepen fiscal inequality and stall regional development.
Policy prescriptions for fiscal sustainability
The Policy Brief recommended Establishing State Debt Management Offices (DMOs) in all 36 states, Mandatory real-time debt reporting and quarterly public disclosures , Linking federal bailouts/support to improvements in IGR and fiscal transparency, Revising the revenue allocation formula to address vertical and horizontal imbalances, Capping contractual deductions and publishing the full terms of major borrowing agreements.
The NEITI Executive Secretary, Dr. Orji Ogbonnaya Orji stressed that this is “not a name-and-shame exercise, but a mirror and a map” to reflect fiscal realities, and a map to guide states toward resilience, transparency, and equitable growth.
Dr Orji cautioned that “Debt, when managed efficiently, can be a tool for financing development at the grassroots. But when servicing obligations consume up to a third of monthly revenues, it becomes a threat to the future of public service delivery and economic stability.”
The Executive Secretary NEITI affirmed that NEITI’s recommendations align with its mandate under the NEITI Act and Nigeria’s obligations under the global Extractive Industries Transparency Initiative (EITI) Standards, particularly on debt transparency, subnational transfers, and revenue governance.
NEITI further pointed out that as Nigeria navigates a challenging fiscal landscape, the Policy Brief stands as both a red flag, a warning bell and a reform blueprint urging state and federal authorities to act decisively with bold reforms before debt becomes not just a burden, but a destination.
Experts caution states
Commenting on NEITI’s caution against excessive borrowing, a Lagos based analyst, Bayo Idowu Fasunmola said borrowing itself isn’t bad but it should not be excessive.
He said, “There are three factors to be considered when it comes to borrowing, the first is the purpose of the borrowing, the second factor is the expected outcome of that purpose and the third is the capacity to pay back.
“We should look at these three factors and look at borrowing or our debt as it is now in light of our GDP.
“Nations of the world, even the richest nations borrow but for Nigeria at the moment, it is not the right time for our states to borrow. The State Houses of Assembly should not hesitate to turn down any borrowing request from the governors.”
Muyiwa Lawanson, another expert, said, “The states’ debt profiles sound alarming.”
He said indices and indicators show that most states are going beyond the optimal level of debt for their states to pay back easily.
“Usually for debt to be beneficial to the economy, it should be such that the debt to GDP ratio gives us a value less than 60 per cent, that is, 0.6 in decimal terms.”
Ejiofor Martin, another economic expert said, “No state should be willing to have too much debt on its necks. If a state is borrowing money and using the money for self-repayment projects known as self-liquidated projects meaning, the money is invested in infrastructure that will generate sufficient economic value to pay the debt as and when due, then such a loan is not a problem. This is a sustainable debt”, he said.