Nigeria’s subnational debt profile expanded significantly in 2025, with the combined external debt of 32 states and the Federal Capital Territory rising to nearly $5.7 billion, even as Federation Account Allocation Committee (FAAC) disbursements reached record highs.
Fresh data from the Debt Management Office (DMO) shows that the external debt stock of the 36 states and the FCT increased from $4.80 billion at the end of 2024 to $5.68 billion by December 31, 2025. This represents a net rise of $884.66 million, or 18.43 per cent year-on-year.
The analysis revealed that borrowing activity was widespread, with 33 of the 37 subnational entities—including the FCT—recording increases in their external debt positions. This accounts for 89.19 per cent of all states. Only four states recorded declines, representing just 10.81 per cent of the total.
In total, the combined increases across states amounted to $944.12 million, while reductions stood at only $59.46 million. The imbalance highlights a strong borrowing trend, with increases outweighing declines by nearly 16 to 1.
A significant takeaway from the data is that despite improved revenue inflows from FAAC—driven by higher oil prices, currency devaluation gains, and subsidy removal savings—many states continued to rely heavily on external borrowing rather than using the additional fiscal space to reduce debt exposure.
Using the DMO’s 2025 exchange rate of N1,435.2571/$1, the $944.12 million increase in external borrowing translates to roughly N1.36 trillion in naira terms.
FAAC Growth vs Rising Debt
The increase in borrowing comes at a time when FAAC allocations to states have surged significantly. States received N7.315 trillion in 2025, compared to N5.186 trillion in 2024—an increase of about N2.13 trillion, or 41 per cent.
When the constitutionally mandated 13 per cent derivation fund is included, total state-related inflows rose to N8.934 trillion in 2025, up from N6.533 trillion in 2024, representing an increase of about N2.4 trillion or 36.74 per cent.
Overall FAAC disbursements to all tiers of government rose from N15.259 trillion in 2024 to N21.897 trillion in 2025. Despite this, states’ share of total allocations remained broadly stable at about 33–34 per cent without derivation and 40.8 per cent when derivation is included.
However, instead of easing debt accumulation, analysts observe that rising inflows have coincided with increased borrowing at the subnational level.
Debt Service Pressures Rising
Compounding concerns is the rising cost of debt servicing. States paid N455.38 billion in foreign debt service in 2025, up from N362.08 billion in 2024. This represents an increase of N93.30 billion, or 25.77 per cent year-on-year.
In practical terms, a larger share of FAAC allocations is now being diverted to debt repayment, reducing fiscal space available for salaries, infrastructure, and essential public services.
Which States Are Borrowing More—and Which Are Not
While borrowing increased across most states, a few recorded declines. Edo State posted the largest reduction, with external debt falling by $29.02 million (7.58 per cent), from $383.05 million to $354.03 million.
Rivers State followed with a $28.69 million decline (14.37 per cent), while Anambra and Bayelsa recorded marginal reductions of $1.11 million and $0.64 million respectively.
However, the broader trend was sharply upward across most states.
Katsina nearly doubled its external debt, rising by $100.16 million to $200.62 million—an increase of 99.70 per cent. Kaduna’s debt rose by $59.19 million to $684.29 million, placing it among the most indebted states externally after Lagos.
Kogi recorded a 126.07 per cent increase, adding $66.08 million, while Niger more than doubled its debt with a 109.18 per cent rise of $73.38 million. Plateau posted the steepest percentage increase at 187.24 per cent, with an additional $60.24 million in external borrowing.
Gombe’s debt rose by 168.70 per cent, jumping from $33 million to $88.66 million, while Benue and Yobe recorded increases of 128.16 per cent and 136.56 per cent respectively.
Imo, Oyo, Sokoto, and Jigawa also saw sharp increases ranging between 63 per cent and 95 per cent.
At the lower end, Lagos—still the largest debtor state externally—recorded only a marginal increase of $4.83 million, or 0.41 per cent, maintaining a relatively stable position at $1.17 billion.
Regional Breakdown and Moderate Increases
Cross River’s debt rose by $20.46 million to $222.92 million, while Bauchi increased by $33.75 million to $220.57 million. Ogun and Ondo also recorded moderate rises.
In the South-East, Ebonyi increased by $16.94 million, Enugu by $12.83 million, and Abia by $5.69 million.
Adamawa, Akwa Ibom, Delta, Ekiti, and the FCT also recorded increases, with the FCT rising from $19.48 million to $26.80 million—an increase of 37.53 per cent.
Debt Composition and Structural Concerns
According to the DMO, most subnational external loans are multilateral in nature, with limited exposure to bilateral and commercial borrowing sources.
However, analysts warn that the continued accumulation of foreign debt exposes states to exchange rate risks, particularly given Nigeria’s currency volatility.
Professor of Economics at Ekiti State University, Taiwo Owoeye, noted that dollar-denominated debt becomes more expensive as the naira weakens. “Since most of the debts are dollar-denominated, every depreciation of the local currency automatically inflates repayment obligations,” he said.
He added that this trend forces states to divert more revenue toward debt servicing at the expense of development projects, while also weakening fiscal autonomy.
Concerns Over Fiscal Discipline and Incentives
BudgiT’s Country Director, Vahyala Kwaga, argued that rising FAAC allocations may be weakening incentives for states to grow internal revenue. He stressed that fiscal sustainability requires states to focus more on domestic revenue generation and efficiency.
“The more FAAC allocations go to states, the more disincentivised they appear to be to boost their internally generated revenue,” he said.
The Nigeria Extractive Industries Transparency Initiative (NEITI), through its Acting Director of Communication and Stakeholders Management, Obiageli Onuorah, also raised concerns that states with high debt burdens often rank poorly in fiscal health indicators despite receiving significant allocations.
Structural Risks and Long-Term Outlook
Chief Economist at Proshare Nigeria, Teslim Shitta-Bey, warned that weak balance sheet management at both federal and state levels could worsen fiscal vulnerabilities.
He argued that while borrowing may appear convenient, it is not a sustainable financing strategy. He suggested exploring longer-term, equity-like debt structures as a more stable alternative.
Macroeconomic analyst Dayo Adenubi also called for stronger emphasis on internally generated revenue as states face growing debt obligations and constrained fiscal space.
Despite record FAAC inflows and improved revenue conditions, Nigeria’s states are increasingly leaning on external borrowing—raising concerns about long-term debt sustainability, exchange rate exposure, and the ability of subnational governments to fund development priorities without deepening fiscal strain.