The Nigeria Extractive Industries Transparency Initiative (NEITI) has raised the alarm over the heavy deductions for debt servicing from states’ monthly allocations, warning that these deductions, which can reach up to 30 per cent, are severely constraining the capacity of state governments to fund social services and critical infrastructure.
According to NEITI, these significant monthly deductions from state revenues constitute a “silent fiscal emergency” that undermines economic stability and development at the subnational level.
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.
NEITI’s policy brief noted that between 10 per cent and 30 per cent of states’ federally allocated revenues are being deducted at source to service debt obligations. This leaves limited fiscal space for states to invest in grassroots infrastructure, healthcare, education, and poverty alleviation initiatives. The situation is particularly worrisome for states with high debt burdens but lower revenue allocations, exacerbating regional economic disparities and stalling development.
According to the report, Kaduna, Ogun and Cross Rivers States tops other states in borrowing patterns going by the percentage of deductions from federal allocations.
The agency’s report notes that, despite a 43 per cent overall increase in Federation Account allocations in 2024, states still face significant pressure from debt deductions. For instance, Lagos alone had deductions nearing N165 billion, representing over 20 per cent of total deductions across states, while Kaduna, Rivers, and Bauchi also faced substantial debt servicing cuts. These financial burdens threaten the delivery of vital public services and infrastructure projects critical to economic growth and social welfare.
NEITI’s executive secretary, Dr. Orji Ogbonnaya Orji, emphasised that while borrowing can be a useful tool for development, debt servicing consuming up to a third of states’ monthly revenues poses a real threat to the future sustainability of public service delivery. The report recommends establishing State Debt Management Offices to improve oversight, mandatory real-time debt reporting, and transparency measures. It also calls for revising federal revenue allocation formulas, capping excessive contractual deductions, and linking federal bailouts to improved internally generated revenue and transparency.
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 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.
The report reveals that Kaduna State recorded the highest 2024 deduction ratio at 32.06 per cent translating to N51.2 billion deducted from N159.7 billion in gross allocations.
Ogun State followed with 27 per cent (N33bn from N123 billion), Bauchi with 26 per cent (N37 billion from N142 billion), and Cross River with 24 per year (N28 billion from N119 billion).
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.
High and unsustainable debt servicing obligations pose risks to state-level stability and undermine the developmental impact of extractive revenues.
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.
From the NEITI Policy Brief, these high-debt states contrast sharply with low-debt performers such as Borno with only 2.63 per cent debt reduction obligations, Jigawa 2.74 per cent, 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 per cent, and Anambra 4.54 per cent, where prudent borrowing and efficient fiscal management have preserved over 95 per cent of gross allocations for direct development spending.
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.
Dr. 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.
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.”
He 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.
