Key points
- Nigeria’s states and FCT’s external debt rose by 18.43% to $5.68bn in 2025 despite higher FAAC inflows.
- 33 out of 37 subnational governments increased borrowing, with Katsina and Kaduna among the fastest risers.
- Debt servicing cost jumped to N455.38bn, tightening fiscal space for development spending.
Main story
Nigeria’s subnational debt profile has expanded significantly, with external borrowing by the 36 states and the Federal Capital Territory (FCT) climbing to $5.68bn by the end of 2025, up from $4.80bn in 2024, according to data from the Debt Management Office (DMO).
This represents an $884.66m increase within a year, or 18.43 per cent growth, even as states recorded a substantial rise in revenue inflows from the Federation Account Allocation Committee (FAAC).
FAAC disbursements to states rose from N5.186tn in 2024 to N7.315tn in 2025, while total inflows, including derivation funds, reached approximately N8.934tn. Despite this liquidity boost, most states increased their reliance on external loans.
An analysis shows that 33 of 37 subnational entities expanded their debt portfolios, while only Edo, Rivers, Anambra, and Bayelsa recorded reductions. Edo led the decline with $29.02m, followed by Rivers with $28.69m.
However, borrowing increases far outweighed reductions, at a ratio of nearly 16 to 1.
States such as Katsina, Kaduna, Kogi, Niger, Plateau, Gombe, and Benue recorded notable spikes. Katsina almost doubled its external debt with a $100.16m increase, while Kaduna’s debt rose by $59.19m to $684.29m.
Lagos State, despite having the largest debt stock at $1.17bn, recorded a marginal increase of just 0.41 per cent, suggesting comparatively restrained borrowing behaviour.
Meanwhile, debt servicing obligations have also risen sharply. States collectively spent N455.38bn on external debt servicing in 2025, a 25.77 per cent increase from N362.08bn in 2024.
The issues
The growing debt profile has raised concerns about fiscal discipline and sustainability at the subnational level. Analysts note a contradiction between rising revenue allocations and continued borrowing.
A key concern is the increasing proportion of FAAC inflows being channelled into debt repayment rather than capital development or social services.
There are also warnings over exposure to foreign exchange risk, as dollar-denominated loans become more expensive to service amid naira depreciation.
Additionally, disparities between revenue growth and borrowing patterns suggest weak fiscal planning in several states, with limited emphasis on internally generated revenue (IGR) expansion.
What’s being said
Stakeholders have expressed concern over the trend. Fiscal transparency advocates argue that higher allocations have not translated into reduced borrowing pressure.
Analysts at the Nigeria Extractive Industries Transparency Initiative (NEITI) have previously warned that several states with modest allocations still carry high debt servicing burdens, raising questions about debt sustainability ratios.
Budget analysts also caution that rising federal transfers may be weakening incentives for states to strengthen domestic revenue mobilisation.
Economic experts further warn that continued borrowing without productivity gains risks locking states into a cycle of debt dependency, where a growing share of income is committed to servicing obligations.
What’s next
Attention is expected to shift toward tighter fiscal monitoring and potential reforms aimed at improving subnational debt management.
States may face increasing pressure to prioritise internally generated revenue and adopt stricter borrowing frameworks tied to measurable economic returns.
Policy discussions are also likely to focus on improving transparency in borrowing decisions and strengthening debt sustainability assessments at the state level.
Bottom line
Despite record FAAC inflows, Nigeria’s states are borrowing more, not less—raising concerns about fiscal discipline and long-term sustainability.
Without stronger revenue mobilisation and more cautious borrowing practices, rising debt levels could gradually erode the fiscal gains from increased national revenues, leaving states more constrained in funding development priorities.
