As Nigerian states prepare for the 2026 fiscal year, many governors are unveiling ambitious spending plans despite limited capacity to fund them internally, forcing heavier reliance on federal allocations, loans, and one-off revenue sources.
A review of appropriation bills and approved budget estimates across several states reveals a persistent structural weakness: internally generated revenue (IGR) remains insufficient to support planned expenditure, particularly capital projects.
The analysis shows that most states continue to depend on federally shared revenue from the Federation Accounts Allocation Committee (FAAC) as their most stable and predictable funding stream. Value-added tax distributions and, for oil-producing states, derivation proceeds also play a critical role.
Lagos Still Turns to Debt
Lagos State, Nigeria’s economic hub, has proposed a N4.237tn budget for 2026—the largest ever by a subnational government. Governor Babajide Sanwo-Olu said the proposal, anchored on the T.H.E.M.E.S.+ development agenda, would be financed largely through N3.12tn in IGR and federal transfers, with the balance sourced from bonds and loans.
Despite Lagos’ strong tax base—comparable to those of some smaller African economies—borrowing remains necessary to close the funding gap, highlighting the scale of its spending ambitions.
Wide Gaps in Other States
Abia State faces steeper fiscal constraints. Governor Alex Otti’s proposed N1.016tn budget allocates 80 per cent to capital expenditure and 20 per cent to recurrent spending. Revenue projections include N83.2bn from FAAC, N67.1bn from VAT, N26.5bn from grants, and N168bn from other federal sources, totalling N607.2bn.
The resulting N409bn shortfall represents about 40 per cent of the budget. While recurrent expenses are expected to be covered by IGR, capital projects will rely heavily on borrowing and external inflows.
Dr Ayodeji Ebo, Managing Director of Optimus by Afrinvest, warned that this funding model poses long-term risks.
“Federal transfers, loans, and temporary inflows are volatile and largely beyond state control,” he said. “This makes budgets vulnerable to oil price shocks and discourages innovation in revenue generation.”
Ogun State’s N1.669tn “Budget of Sustainable Legacy” follows a similar pattern. The state expects N509.88bn from IGR, N554.81bn from federal transfers, and N518.9bn from capital receipts, including loans and grants. Although the budget is technically balanced, more than 30 per cent of funding depends on non-recurring sources.
Enugu State’s N1.62tn budget represents a 66.5 per cent increase over the previous year. Capital spending accounts for 80 per cent of the total, with projected revenues including N870bn from IGR, N387bn from federal allocations, and N329bn from loans and grants. Analysts note that about one-fifth of Enugu’s spending relies on non-recurring funds.
High Exposure to External Funding
Osun State approved a N723.45bn budget supported by N421.25bn in recurrent revenue, N286.01bn in capital receipts, and an opening balance of N16.19bn. While inflows match planned expenditure, execution depends heavily on securing capital receipts.
Delta State, buoyed by fuel subsidy removal, plans to spend N1.664tn, with 70 per cent allocated to capital projects. Revenue expectations include N720bn from statutory allocations and derivation and N250bn from IGR. Despite reforms, the state remains heavily exposed to oil-linked federal inflows.
Sokoto State’s N758.7bn budget relies overwhelmingly on FAAC and donor funding, with less than 10 per cent of projected revenue coming from IGR. Grants, aid, and capital development funds account for N233.8bn of expected inflows.
Fiscal analyst Aliyu Ilias said states’ dependence on FAAC reflects deeper structural weaknesses.
He proposed a counterpart funding model that rewards states which increase IGR, warning that without incentives, reliance on Abuja will persist.
Diverse Models, Similar Risks
Edo State’s N939.85bn budget combines IGR, FAAC allocations, grants, and public-private partnerships. However, delays or underperformance in external funding could disrupt execution.
Bayelsa State plans to spend N1.01tn, with IGR contributing less than 10 per cent of projected revenue. Oil-linked allocations, loans, and grants dominate funding sources.
Gombe State’s N535.7bn budget depends significantly on capital receipts and carryover balances, while Kwara State’s N644bn budget is highly sensitive to national economic assumptions, including oil prices, exchange rates, and GDP growth.
Experts Call for Structural Reform
Economists argue that fiscal sustainability lies in strengthening local economies, not expanding debt.
“States must identify and develop their comparative advantages—whether agriculture, manufacturing, tourism, or services,” Ebo said. “Reliable infrastructure, predictable taxation, and public-private partnerships are critical.”
Analysts note that only a few states, including Ogun and Osun, have budgets closely aligned with realistic revenue projections—and even these rely on borrowing and capital receipts.
Ilias warned that while total revenue could approach N35tn, any shortfall would likely affect capital spending first, as salaries and debt servicing remain non-negotiable.
He stressed that maintaining fiscal discipline and adhering to a January-to-December budget cycle is essential for effective implementation and improved public outcomes.
