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Weak internally generated revenue pushes most states toward federal transfers
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Loans, grants, and other one-off inflows form a large share of projected income
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Economists caution that growing dependence threatens long-term fiscal health
As state governments prepare for 2026, many are unveiling expansive spending plans that far exceed what they can realistically fund from their own revenue sources.
With internally generated revenue (IGR) remaining modest in most states, governors are increasingly turning to federal allocations, borrowing, and temporary inflows to finance their budgets.
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A review of budget proposals and approved estimates across the federation shows that FAAC disbursements remain the backbone of state finances, often complemented by VAT receipts and, in oil-producing states, derivation funds.
Only a small number of states can fund a substantial portion of their expenditure from IGR, raising concerns about the feasibility of capital projects and debt sustainability.
Lagos State, despite its strong tax base, illustrates the challenge. Its proposed ₦4.237 trillion 2026 budget—the largest ever by a subnational government—will be funded through a mix of IGR, federal transfers, and borrowing.
While the state plans to generate over ₦3 trillion internally, bonds and loans are still required to balance the books.
In Abia State, the pressure is more pronounced.
The ₦1.016 trillion budget devotes a large share to capital spending, but projected revenue falls hundreds of billions short, leaving a wide financing gap that will be filled through federal inflows, grants, and debt. Although recurrent costs may be covered by local revenue,infrastructure projects will rely heavily on external support.
A similar pattern appears in Ogun State, where a ₦1.669 trillion budget depends on a blend of IGR, federal transfers, and capital receipts such as loans and grants. More than a third of the state’s funding is expected from non-recurring sources, making execution vulnerable to delays or shortfalls.
Enugu State’s proposed ₦1.62 trillion budget marks a sharp increase over the previous year, with capital projects taking the lion’s share. However, a significant portion of its revenue assumptions is tied to borrowing and grants, highlighting continued reliance on outside funding.
Economic analysts warn that this approach exposes states to risks beyond their control.
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According to financial experts, heavy dependence on FAAC and loans makes budgets sensitive to oil prices, exchange rates, and federal fiscal performance. Over time, this can weaken incentives for states to deepen local economic activity and expand tax bases.
In the South-South, oil-producing states such as Delta and Bayelsa are banking on higher federal inflows following subsidy removal, yet their budgets still show limited IGR relative to total spending.
In Sokoto, less than a tenth of projected revenue is expected to come from local sources, underscoring deep reliance on federal transfers and donor funding.
States like Edo, Gombe, and Kwara have adopted diversified funding strategies that include public-private partnerships and macroeconomic assumptions, but analysts note that these revenues are not guaranteed and could stall projects if they fall short.
Fiscal experts argue that long-term stability will require states to look inward, develop sectors where they have comparative advantages, and attract private investment through better infrastructure and predictable policies.
They also advocate incentives that reward states for growing IGR, rather than reinforcing dependence on Abuja.
With most governors stretching spending beyond assured income, analysts caution that capital projects are likely to suffer if revenues underperform, as salaries and debt obligations will take priority.
