Shrinking foreign aid is putting pressure on Nigeria to raise more revenue through taxes. Even with recent gains and ongoing tax reforms, policymakers face a delicate balance between increasing collections and sustaining economic growth.
“Nigeria can theoretically offset foreign aid cuts by improving domestic revenue collection, especially by expanding the tax base and boosting compliance,” said Yvonne Afolabi, a tax expert.
“The Nigeria Revenue Service has already increased collections through digitisation and stronger enforcement.”
But she warned that there are limits. “Nigeria’s tax-to-GDP ratio is low compared to peer economies, which restricts how much revenue can be raised quickly without straining the economy,” Afolabi said.
“Raising tax rates alone is unlikely to fill major aid gaps. Higher taxes could hurt small businesses and reduce household spending. Instead, plugging leakages and bringing more informal businesses into the tax net may provide more sustainable results.”
Nigeria received about $3.6 billion in net official development assistance (ODA) in 2023, lower than 2022 levels. The Organisation for Economic Co-operation and Development (OECD) projected that global ODA could fall by 9 to 17 percent in 2025, with sub-Saharan Africa facing a potential 16 to 28 percent drop in bilateral aid.
In early 2025, Nigeria recorded negative ODA flows, meaning debt repayments to multilateral creditors, including the World Bank and International Monetary Fund, exceeded new aid inflows.
This “net outflow” has added urgency to the Nigeria Revenue Service’s (NRS) mandate to bridge the fiscal gap.
Aid continues to support infrastructure, health, education, and agriculture. Concessional loans from multilateral institutions finance large-scale projects such as railways and power.
Grants fund humanitarian and nutrition programmes, including the Humanitarian Response Plan, which required $926.5 million in 2024 but fell short of full funding.
“The political and economic environment also matters,” Afolabi added. “In a high-inflation economy where incomes are fragile, new taxes can be unpopular. Aggressive taxation could worsen inequality and hurt households.”
Nigeria’s 2026 budget highlights the challenge. Total expenditure is projected at N58.18 trillion, with revenues of N34.33 trillion and a deficit of N23.85 trillion, or about 4.3 percent of gross domestic product.
Read also: PE firms freeze deals in Nigeria as they lobby over higher tax – Bloomberg
Debt service will consume N15.52 trillion, roughly 45 percent of projected revenue. External borrowing of N3.58 trillion will cover 20 percent of new borrowings, leaving domestic revenue as the primary source of financing.
Revenue performance offers some optimism. From January to August 2025, collections rose 40.5 percent year-on-year to N20.59 trillion, mostly from non-oil sources. The tax-to-GDP ratio, estimated at 9.5 percent in early 2026, is projected to rise to 10.2 percent as reforms take hold.
The NRS has modernised tax collection with digital invoicing and tighter taxpayer identification. Large companies continue to pay a 30 percent corporate income tax rate, while small businesses with turnovers under 100 million naira are exempt.
A new 4 percent Development Levy consolidates several smaller charges, including the Tertiary Education Tax and the National Information Technology Development Agency levy, reducing the complexity of compliance.
“Ultimately, Nigeria can partially offset aid cuts through better tax administration, but fully replacing aid in the short term would be difficult,” Afolabi said. “Structural reforms, spending efficiency, and economic growth must complement any taxation strategy.”
Structural limits remain. Nigeria’s tax-to-GDP ratio is below the sub-Saharan African average of over 15 percent, and general government revenue is just 5.7 percent of GDP, according to the International Monetary Fund. These figures underline the narrow fiscal base and the difficulty of fully replacing aid.
The IMF supports Nigeria’s reforms, including fuel subsidy removal and exchange rate unification, and has upgraded growth projections to 4.4 percent for 2026. At the same time, it warns that revenue forecasts are historically over-optimistic and high debt service costs constrain spending flexibility.
Economic realities complicate matters further. Inflation has eased to 15.10 percent in January 2026, but real incomes remain fragile.
In this context, simply raising taxes could backfire. “Aggressive tax increases can be counterproductive if businesses cut investment or consumers reduce spending,” Afolabi said. “The tax base could shrink rather than expand.”
Analysts argue that addressing leakages, simplifying exemptions, and formalising informal businesses may yield more sustainable revenue than hiking rates alone. Improving spending efficiency and leveraging public-private partnerships could also reduce reliance on both aid and debt.
While stronger domestic revenue mobilisation can soften the blow of declining foreign assistance, fully replacing it through taxation alone seems unlikely in the near term. Nigeria’s fiscal strategy will depend on the success of tax reforms, economic growth, prudent borrowing, and the credibility of ongoing policies.
