Fitch Ratings has recently revealed that Nigerian state governments are struggling to execute capital expenditure (CAPEX) initiatives, with only about 60% of budgeted amounts being utilized. This inefficiency in executing CAPEX is partially attributed to high debt servicing costs which consume a significant portion of available resources. The findings were published in Fitch’s latest Nigerian States Framework Report, which outlines the major financial challenges faced by state governments. Despite these hurdles, all states rated by Fitch have maintained a positive outlook, reflecting the broader positive trends attributed to the Federal Government’s fiscal policies, which impact state revenue generation and debt management.
One of the primary factors impacting states’ financial health is the increasing burden of external debt servicing, particularly as the free-floating naira exchange rate rises. This situation has led to reduced funds available for states to spend autonomously, as external debt obligations are often met through direct deductions from the Federal Accounts Allocation Committee (FAAC) transfers. The situation is exacerbated by the fact that most Nigerian states heavily depend on subsidies from the federal government for financing major investments. Due to mounting funding challenges and bureaucratic hurdles, states are often unable to fully utilize their allocated CAPEX budgets, resulting in significant unexecuted budgets that could have been directed towards essential public projects.
In addition to struggles with CAPEX execution and debt servicing, Nigerian states face further complications from their internal revenue generation. The report indicates that growth in internally generated revenue (IGR) has remained subdued, hindered by socioeconomic issues and inefficiencies in tax collection systems. Some states, especially Lagos, have managed to maintain stronger IGR capabilities; however, the majority rely heavily on FAAC transfers, increasing their vulnerability to fiscal shocks stemming from fluctuations in oil revenue and federal disbursements. Rising operational expenses driven by high inflation rates and wage increases for public workers only compound these financial pressures, putting additional strain on state budgets.
Moreover, the evolving institutional framework for local and regional governance appears to be struggling to keep pace with the growing demand for public services, such as education and healthcare. The challenges faced by state governments often lead to vertical fiscal imbalances, which can create structural funding gaps. Such gaps may force states into taking on more debt or shifting financial risks off-balance sheet in an attempt to bridge deficits. The Fitch-rated subnational entities, including states like Kaduna, Oyo, Benue, Kogi, and Lagos, are not only faced with these issues but must also navigate a complex financial landscape of regulations affecting their debt and liquidity management.
In light of these pressing challenges, a recent report by BudgIT, a civic-tech organization, further highlighted the reliance of many states on federal allocations. In 2023, it was reported that 32 out of Nigeria’s 36 states depended on FAAC allocations for at least 55% of their total revenues. This reliance on federal transfers poses significant risks, particularly in a volatile economic environment interconnected with global oil markets. Reports indicate that between January and August of this year, the government’s debt servicing expenditures hit N7.41 trillion, exceeding predictions significantly and reflecting the dire financial situation facing Nigeria overall.
The 2023 Medium-Term Expenditure Framework had initially allocated N6.55 trillion for debt servicing; however, the actual spending ballooned to N8.56 trillion—an alarming increase above the budgeted amount. Upcoming fiscal plans appear to lean more heavily on debt servicing and personnel costs while decreasing allocations for CAPEX—a trend illustrated by the drop in CAPEX from 42.3% of the budget in 2024 to just 34.4% in 2025. This de-emphasis on investment in infrastructure highlights a critical transitioning phase in Nigeria’s financial strategy, pushing the burden of debt even higher and jeopardizing the potential for long-term development.
