Nigeria’s states face heat over soaring FAAC funds

The era of states struggling to pay salaries may have passed, but the era of real development is yet to arrive. Despite record-breaking allocations from the Federation Account, questions linger over whether states are translating the windfall into tangible improvements for citizens.

Record-breaking allocations

Nigeria’s states and local governments are witnessing an unprecedented surge in allocations from the Federation Account Allocation Committee (FAAC), reflecting the impact of recent fiscal and monetary reforms as well as buoyant oil receipts propelled by currency devaluation.

From N3.58 trillion in 2023, states’ allocations jumped to N5.81 trillion in 2024, a year-on-year increase of about 62 percent. The upward trend has continued in 2025, with states receiving N3.425 trillion between January and June.

When allocations for the 13 percent derivation principle (N755.67 billion) are included, total inflows to states for the first half of 2025 rise to N4.181 trillion. Adding in the share of local governments (N2.504 trillion), the combined inflow to subnational governments hit N6.685 trillion in just six months.

This figure already surpasses the entire amount states received in 2023, underscoring how quickly FAAC disbursements are expanding.

Why the surge?

Several factors explain the windfall. Subsidy removal in mid-2023 freed up significant oil revenues previously absorbed by petrol subsidy payments. NNPC remittances to the Federal Government surged by 98 percent in the first half of 2025, while total Value Added Tax (VAT) collections rose by 86 percent from N3.6 trillion in 2023 to N6.7 trillion in 2024, according to NBS data.

Exchange rate reforms have boosted naira-denominated FAAC inflows, as oil exports and other dollar earnings translate into larger naira sums. Oil prices have not moved in the direction the nation hoped, but oil production improved from 1.26 million barrels per day in 2023 to 1.34 million in 2024. The government has also been collecting more taxes, like the Electronic Money Transfer Levy (EMTL) across the federation.

Pressure on the states to deliver

This surge in revenue marks a rare opportunity to accelerate development plans long stalled by chronic underfunding and to improve the states’ productivity.

“States now have more revenue to execute their programmes such as improving infrastructure, paying salaries and pensioners,” said Muda Yusuf, CEO of the Centre for Promotion of Private Enterprises (CPPE).

He, however, raised the question of how well the revenues are being deployed to drive meaningful development, noting that states ought to be publishing their accounts for transparency. Many states have been faithful to the publication of their budget implementation reports, though not all.

Yusuf stated that poor management of resources by the states has resulted in little or no impact on the lives of the people, cautioning against “overestimating the growth of the revenues by the states.”

“The fact that revenue has grown in nominal terms doesn’t mean they can buy much. The nominal growth can be misleading. It creates an illusion that the states are getting richer, so we must factor this into our expectations,” he added.

President Bola Tinubu embarked on a series of radical reforms two years ago, including scrapping costly petrol subsidies and relaxing longstanding foreign exchange restrictions, a move that saw the naira slump by more than 70 percent.

Tinubu’s goal was to trigger an influx of foreign capital and eventually make Nigeria a more attractive investment destination, thereby increasing the nation’s fiscal buffers. However, the latest capital importation data reveal gaps in the type of capital Nigeria receives. In Q1 2025, foreign portfolio investment (FPI) accounted for 92 percent, while foreign direct investment (FDI) was just 2 percent.

Though stabilisation has returned, Nigerians continue to bear the brunt of rising prices. This wave of infrastructure development offers a glimmer of long-term benefit.

If sustained and transparently managed, the revenue windfall could build the roads, schools, hospitals, and digital systems that improve productivity and ease the worst cost-of-living crisis in a generation.

What next for states and LGAs?

The windfall provides an opportunity for subnational governments to expand fiscal space, improve service delivery, and address infrastructure gaps. However, it also raises important questions about utilisation. Are states channeling these additional funds into capital projects or recurrent expenditure?

BusinessDay analysis shows that governors are not prioritising poverty alleviation programmes, and this needs to improve. With LGAs receiving over N2.5 trillion in just six months of 2025, transparency in grassroots spending will be under greater scrutiny. The volatility of oil earnings and exchange rate pressures means allocations could swing unpredictably, making prudent fiscal management essential.

The surge in FAAC allocations marks a historic moment for Nigeria’s subnational governments. Yet, whether this windfall translates into tangible improvements in citizens’ lives will depend on the discipline, transparency, and policy choices of state and local government leaders.