States’ external debt nears $6bn despite surge in FAAC allocations

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By BizWatch Nigeria

Key Points

• Subnational external debt rises to $5.68bn in 2025
• 33 states and FCT record increased borrowing
• FAAC allocations jump by over N2tn year-on-year
• Debt servicing costs rise 25.77% to N455.38bn

Main Story

Nigeria’s state governments and the Federal Capital Territory significantly increased their external borrowing in 2025, pushing total subnational foreign debt to $5.68 billion, despite a sharp rise in revenue allocations from the Federation Account.

Data from the Debt Management Office (DMO) showed that external debt rose by $884.66 million year-on-year from $4.80 billion in 2024, representing an 18.43% increase.

A breakdown of the figures revealed that 33 out of 37 subnational entities expanded their external debt positions, highlighting widespread reliance on foreign financing. Only four states—Edo, Rivers, Anambra, and Bayelsa—recorded reductions.

The increase comes amid a substantial rise in Federation Account Allocation Committee (FAAC) disbursements. Total allocations to states climbed to N7.315 trillion in 2025 from N5.186 trillion in 2024, representing a 41% increase. When derivation revenues are included, total inflows rose to approximately N8.934 trillion.

Despite these improved revenues, borrowing activity remained strong, suggesting that many states are prioritising infrastructure development and fiscal obligations over debt reduction.

Several states recorded sharp increases in borrowing. Katsina nearly doubled its external debt, while Kogi, Niger, Plateau, and Gombe posted triple-digit percentage increases. Kaduna also saw a substantial rise, further cementing its position among the most externally indebted states after Lagos.

Lagos, however, recorded only marginal growth of 0.41%, indicating a more cautious borrowing approach despite maintaining the largest debt stock at approximately $1.17 billion.

What’s Being Said

Fiscal experts have raised concerns about the sustainability of rising debt levels.

“States face financial strain due to debt repayments despite record FAAC inflows,” said Obiageli Onuorah of the Nigeria Extractive Industries Transparency Initiative (NEITI).

BudgIT’s Country Director, Vahyala Kwaga, warned that increased federal allocations may be discouraging states from improving internal revenue generation.

“Fiscal sustainability requires states to look inward… improving revenue systems and prioritising long-term investments.”

Economist Taiwo Owoeye highlighted currency risks:

“Since most debts are dollar-denominated, naira depreciation increases repayment obligations.”

Similarly, Proshare’s Chief Economist, Teslim Shitta-Bey, criticised poor fiscal management:

“Borrowing might seem like an easy way to run operations, but it is not necessarily the right approach.”

What’s Next

With debt servicing costs rising to N455.38 billion in 2025, analysts expect increasing pressure on state finances. Without structural reforms to boost internally generated revenue and manage borrowing, subnational governments may face tighter fiscal space and reduced capacity for capital investment.