As Nigerian states head into 2026 with ambitious spending plans, weak internally generated revenue (IGR) is forcing many to rely heavily on federal allocations, borrowing and other non-recurring inflows to fund their budgets, raising concerns about fiscal sustainability, Sunday PUNCH reports.
An analysis of appropriation bills and approved estimates across several states shows that only a few can finance a significant portion of their expenditure from IGR. In most cases, federally shared revenue from the Federation Accounts Allocation Committee (FAAC) remains the largest and most predictable source of funding, complemented by value-added tax (VAT) distributions and, for oil-producing states, derivation proceeds.
Lagos State stands out with the largest subnational budget on record, proposing to spend N4.237tn in 2026. Governor Babajide Sanwo-Olu said the budget, anchored on his administration’s T.H.E.M.E.S.+ agenda, would be funded mainly through N3.12tn from IGR and federal transfers, with the balance sourced from bonds and loans. Despite its strong tax base, Lagos still depends on debt to close funding gaps.
Other states face far starker constraints. Abia State’s N1.016tn budget leaves a deficit of about N409bn, nearly 40 per cent of total spending, despite allocating just 20 per cent to recurrent expenditure. While recurrent costs are expected to be covered by IGR, capital projects will rely largely on federal inflows, grants and borrowing.
Ogun and Enugu states also show heavy dependence on external and non-recurring funding. Ogun’s N1.669tn budget draws over 30 per cent of its financing from loans and grants, while Enugu’s N1.62tn proposal relies on capital receipts for roughly one-fifth of planned expenditure.
Fiscal experts warn that this model exposes states to significant risks. The Managing Director of Optimus by Afrinvest, Dr Ayodeji Ebo, said dependence on volatile federal transfers and borrowing makes budgets vulnerable to oil price shocks and weakens incentives to build durable local revenue bases.
Oil-producing states such as Delta and Bayelsa continue to bank on federal inflows boosted by subsidy removal and derivation proceeds, yet IGR still accounts for less than 10 per cent of Bayelsa’s projected revenue. Similarly, Sokoto State expects under 10 per cent of its income from IGR, relying heavily on FAAC and donor support.
Fiscal analyst Aliyu Ilias argued that the current system encourages dependency, suggesting that the Federal Government should introduce incentives, such as counterpart funding, to reward states that grow their IGR. He warned that although FAAC allocations are at record levels, they have not consistently translated into better living standards.
Across the country, analysts say capital expenditure is most at risk if revenue projections fall short, as recurrent obligations must be met first.
With 34 governors already submitting 2026 budget proposals, experts stress that fiscal discipline, realistic assumptions and stronger local economies are essential to ensure states can fund development without sinking deeper into debt.
