THE Nigeria Extractive Industries Transparency Initiative (NEITI), has issued a new policy brief with an alert on what it describes as a “silent fiscal emergency” quietly undermining the economic stability of Nigeria’s states.

Titled: “Beyond federal allocations: the cost of borrowings and debt servicing at state level in Nigeria”, the document provides fresh, evidence-based insights into how debt servicing obligations are constraining states’ capacity to fund essential services, local infrastructure, and poverty reduction initiatives.

Aside providing an incisive examination of the deteriorating fiscal health of Nigeria’s subnational governments, the brief explores the rising burden of debt servicing deductions from Federation Account Allocation Committee (FAAC) revenues and the persistently weak Internally Generated Revenue (IGR) performance across states. Read the full policy brief here.

The Executive Secretary of NEITI, Orji Ogbonnaya Orji, explained that the decision to undertake the research leading to the policy document was rooted in its statutory mandate under the NEITI Act 2007 and in line with the global Extractive Industries Transparency Initiatives (EITI) standards which requires disclosures on revenue allocations and subnational transfers.

“This policy brief is both timely and strategic. It provides a comprehensive assessment of the growing fiscal vulnerabilities confronting Nigeria’s subnational governments, vulnerabilities that are often masked by seemingly robust gross allocation figures but are, in reality, eroded by mounting debt-servicing deductions.

“At its core, the brief reveals the fiscal truth behind the numbers. It moves beyond surface level figures to unveil the shrinking net revenues available to states after deductions for external debt, contractual liabilities, and statutory obligations. By doing so, it exposes the silent but significant erosion of financial capacity at the state level, he explained.

According to Orji, a silent fiscal emergency is unfolding across the 36 States that demands urgent national attention and coordinated policy action.

“Behind the monthly announcements of federal allocations lies a harsher reality: mounting debts, crippling deductions, and shrinking revenues are eroding the capacity of subnational governments to deliver basic services and critical infrastructure,” he said.

The policy brief, he further explains, is both a diagnostic tool and a call to reform, stressing: “It peels back the veneer of gross FAAC allocations to reveal the unsustainable debt servicing burdens that now consume as much as 30 percent of some states’ revenues.

“It exposes the structural fiscal imbalances, regional disparities, and the fragile underpinnings of our revenue-sharing system that increasingly threaten the stability of Nigeria’s federal architecture.”

Underscoring NEITI’s mandate under the Nigeria Extractive Industries Transparency Initiative Act and the global EITI Standard to promote transparency, accountability, and prudent revenue management, Orji said, “This policy brief expands that mandate to interrogate the fiscal health of state governments, especially how extractive- linked revenues are deployed or depleted through opaque deductions, obligations, and weak debt governance under reported frameworks.”

He said the insights presented in the blueprint were drawn from NEITI’s extensive research on the issues, analysis of official data from the Federation Accounts & Allocations Committee which NEITI sits in as Observer, Office of the Accountant- General of the Federation, the National Bureau of Statistics, NEITI’s Oil/Gas and Mining Industry Reports, Fiscal Allocation and Statutory Disbursement Reports, and other covered entities.

“The evidence points to an urgent need for reforms in debt management, public financial accountability, and revenue diversification, particularly in states where the debt- to-allocation ratio has exceeded globally accepted thresholds.

“NEITI, through this policy intervention, seeks to catalyse a national dialogue on subnational fiscal sustainability. We advocate for realistic borrowing anchored on measurable development outcomes, conditional federal support tied to fiscal performance, and institutional reforms that prioritize transparency, real-time reporting, and citizen oversight.”

“This Policy Brief is more than an academic exercise; it is a blueprint for action. It is a tool for federal and state policymakers, development partners, civil society, and oversight institutions to work together in building a more resilient and equitable fiscal future for Nigeria. We must act now before debt becomes destiny,” Orji said.

Inside the policy blueprint

A peek into the policy review shows that using authoritative data from the Office of the Accountant-General of the Federation (OAGF), the National Bureau of Statistics (NBS), and NEITI’s own analysis, the brief uncovers how debt obligations ranging from 10 per cent to over 30 per cent of gross allocations are increasingly crowding out funds for basic public services and infrastructure investment.

Identifying a pattern of unsustainable borrowing practices, compounded by limited economic diversification, fragile tax systems, and weak fiscal transparency, the document presents evidence that many states, especially those with low IGR, are becoming fiscally vulnerable and dependent on volatile oil-derived federal transfers.

The document reveals that in 2024, several states have experienced significant deductions from their gross FAAC allocations ranging from 10 per cent to over 30 per cent to service debts and other financial obligations.

“States such as Kaduna (32.06 per cent), Ogun (26.54 per cent), and Bauchi (26.16 per cent) are among the hardest hit. Simultaneously, the 2023 IGR data indicates that at least ten states, including Taraba, Yobe, Kebbi, and Gombe, generated less than ₦20 billion each in internal revenues.

“These two fiscal stress points’ high deductions and low revenue generation highlight the systemic vulnerability of subnational public finance in Nigeria. The core policy issue emerging from this analysis is the unsustainable reliance on borrowing in the absence of adequate revenue growth.

“Many states continue to depend heavily on volatile federal transfers while accumulating debts that consume an increasing share of their statutory allocations. The consequences are stark: limited fiscal space for capital investment, deferred infrastructure development, and growing public dissatisfaction due to unmet socio- economic needs. Compounding these challenges are weak tax administration systems, low levels of economic diversification, and poor fiscal transparency at the subnational level,” the document reveals.

Against this backdrop, the NEITI policy brief interrogates the true financial health of Nigerian states beyond the headline figures of federal allocations. It examines the growing cost of debt servicing, the implications for public service delivery, and the urgent need for reform.

The research also reveals how unchecked debt servicing and opaque deductions systematically erode the financial capacity of states, thereby encouraging states to plug fiscal drains and retain a greater share of their statutory allocations for critical sustainability.

Underscoring the urgent need to expand state level IGR through digital tax administration, the formalisation of informal enterprises, and incentives for small and medium sized businesses, the policy brief seeks to promote better governance of public resources.

Through its call for the establishment of State Debt Management Offices (DMOs), real time financial disclosures, and independent audits, the brief promotes better governance of public resources. These measures empower states to assess liabilities accurately, negotiate better terms, and avoid high risk borrowing practices.

The policy has also provided recommendations that aim to reduce the burden of debt servicing on core developmental sectors. By advocating for rational borrowing, capped deductions, and improved debt transparency, the brief seeks to secure more fiscal space for infrastructure, healthcare, education, and economic growth initiatives.

Relevance

Aside serving as a diagnostic and reform tool, the brief identifies states with high deduction to allocation ratios, clearly signalling where urgent fiscal interventions are needed to avert financial distress.

It maps out the growing burden of debt and its direct consequences on development planning and public service delivery, while calling for stronger debt management frameworks, transparent borrowing practices, and performance linked fiscal strategies at the subnational level.

By drawing a connection between rising deductions and declining investments in health, education, infrastructure, and economic diversification, the policy makes a powerful case for fiscal sustainability.

While supporting NEITI’s broader transparency agenda, it champions real time disclosure of debt and deductions, helping to deepen Nigeria’s commitment to fiscal openness, accountability, and reform in line with global best practices.

Liabilities and contractual risks

The Policy Brief also flags contractual obligations—notably in Ogun (₦6bn) and Ondo (₦7.73bn) 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, signalling more cautious or strategically timed borrowing.

Inequality in revenue sharing formula

In 2024, Delta State received ₦581.27bn — five times the ₦108.32bn 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.

The Policy Brief recommends:
• 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.

Proposed solutions

To address the issues identified, the policy brief proposes a set of strategic policy options. “First, there is a compelling need for states to strengthen domestic revenue mobilisation, it states, adding: “This includes broadening the tax base through the formalisation of informal enterprises, digitising tax collection systems, and improving tax compliance and enforcement.

“States must also diversify their economies by investing in sectors such as agriculture, manufacturing, and solid minerals to reduce dependence on oil-derived federal allocations. Second, the implementation of robust fiscal responsibility frameworks is critical. State governments must enact and enforce fiscal laws that limit unsustainable borrowing and link debt acquisition to clear developmental outcomes.

“Rationalising public expenditure is also essential this means prioritising high-impact infrastructure and social investments while eliminating wasteful or redundant spending. Thirdly, enhanced transparency in debt reporting and public financial management is vital to restoring public trust and accountability.

“States should be required to publish quarterly debt service reports and adopt NEITI’s standards in managing extractive revenues, especially in resource rich regions. Furthermore, federal support to states whether in the form of debt restructuring or bailouts should be conditional on verifiable improvements in IGR performance, transparency, and fiscal discipline.”

Need for smarter borrowing, transparent debt management by states

The brief notes that states in Nigeria receive substantial monthly allocations from the Federation Account, much of it derived from extractive revenues. However, when between 10 per cent and 30 per cent 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 highlighting the scale and implications of these deductions in the policy brief, NEITI says it is providing citizens, policymakers, and development partners with reliable evidence to drive fiscal discipline and prudent debt management.

NEITI further explains that the brief addresses a critical governance gap by complementing national debt management reforms with robust subnational fiscal transparency. 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 Policy Brief reveals that between 10 per cent and 30 per cent of monthly FAAC allocations in many states are directly deducted at source for debt servicing, leaving less room for grassroots development investment.

For instance, Kaduna State recorded the highest 2024 deduction ratio at 32.06 per cent, translating to ₦51.2bn deducted from ₦159.7bn in gross allocations.

Ogun State followed with 27 percent (₦33bn from ₦123bn), Bauchi with 26 percent (₦37bn from ₦142bn), and Cross River with 24 percent (₦28bn from ₦119bn).

The NEITI Policy Brief indicates that these high-debt states contrast sharply with low-debt performers such as Borno with only 2.63 percent debt reduction obligations, Jigawa 2.74 percent, Benue -3.58 per cent and Nasarawa -3.82 per cent debt burden exposure. Other States with low debt burden commitments include Kebbi 4.06 per cent, Bayelsa -4.46 percent, and Anambra 4.54 per cent, where prudent borrowing and efficient fiscal management have preserved over 95 percent of gross allocations for direct development spending.

The NEITI Policy Brief also examined Positive Debt-to-GDP Management implications and the possible lessons that subnational governments must consider. It 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.

Call to Action

The NEITI Executive Secretary, Orji stressed that this is “not a name-and-shame exercise, but a mirror and a map” a mirror to reflect fiscal realities, and a map to guide states toward resilience, transparency, and equitable growth.

“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.”

Orji affirms 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.

He further affirmed 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. Specifically, the brief addresses the transparency of subnational transfers is required in tracking how federal allocations and natural resource revenues are shared and used.

“The publication of debt and deduction data supports the EITI’s demand for clear reporting on government borrowing and liabilities, especially when linked to extractive revenue. The safeguarding of development spending, ensuring that debt servicing does not compromise public investments in health, education, and infrastructure,” the document reads.

The brief provides clarification of financial flows related to extractive resources, particularly for oil producing states that benefit from the 13 percent derivation fund.

This policy brief contributes significantly to the discourse on sustainable resource mobilisation at the subnational level by highlighting key gaps, proposing corrective strategies, and aligning fiscal practices with broader development objectives.

Read the full Policy Brief here.

NEITI is a government agency that makes sure money from Nigeria’s oil, gas, and mining industries is properly managed. It checks the payments companies make to the government, reports any gaps or problems, and shares the findings with the public.

This report is funded by NEITI.