In a year when Nigeria’s subnational governments received their fattest federation-account inflows in recent memory, an uncomfortable question is now hanging over state capitals from Ikeja to Sokoto and from Jos to Yenagoa.
Where is the impact?
Federation Account Allocation Committee inflows attributable to states rose sharply in 2025, with direct FAAC allocations to state governments put at about ₦7.315tn, up from ₦5.186tn in 2024, a jump of roughly 41 per cent.
When the constitutionally mandated 13 per cent derivation revenue is added, total state-linked receipts climbed to about ₦8.934tn in 2025, versus ₦6.533tn in 2024, a rise of about 36.7 per cent.
The headline number, roughly ₦9tn, has become political dynamite. Labour unions, civil society groups and opposition parties say the cash surge has not produced commensurate improvements in living standards.
Economists agree that fiscal space widened. They warn that dependence on federally shared revenue and weak public financial management continue to blunt long-term development.
This is not merely a governance argument. It is an argument about jobs and purchasing power. It questions whether capital spending creates local contracts and apprenticeships. Alternatively, does it disappear into recurrent overheads, opaque procurement, and election-season war chests?
It is also an argument about the business environment. State governments’ actions with windfalls influence taxes, regulation, and infrastructure reliability. These actions also affect supplier payments and investor confidence. Investors consider these factors when deciding where to build factories, warehouses, and service hubs.
Why the Money Rose So Fast
Three forces typically drive federation inflows, and 2025 was a convergence year.
One is oil and gas revenue, still the backbone of the federation account even when production disappoints. Another is non-oil revenue such as VAT and collections from agencies.
The third is the “exchange difference” factor. This is a technical but potent channel. Currency depreciation and FX accounting can use this channel to inflate naira-denominated distributable revenue.
The NBS monthly FAAC releases demonstrate that exchange gains can be a major component of what is shared. These gains are distributed alongside statutory revenue and VAT.
In practical terms, the weaker the naira, the larger the naira value of certain dollar-linked inflows. This produces higher distributable sums in local currency. This happens even when real economic conditions remain harsh.
That is why critics say the windfall is not a sign of prosperity. It is largely due to naira illusion. This occurs in a high-inflation environment where citizens are paying more for food, rent, transport, power, and school fees.
The monthly pattern also matters. State allocations improved steadily through 2025, peaking around October, before easing in December.
By mid-year, states had already received over ₦3tn. This eased immediate liquidity pressures. The relief was most significant in states with heavy wage bills, arrears, and debt service obligations.
Derivation payments also rose in 2025, strengthening oil-producing states’ cash positions at a moment of intense fiscal stress nationwide.
The Core Charge: More Cash, Same Hardship
Organised labour’s critique is blunt. The Nigeria Labour Congress argues that higher allocations have not delivered meaningful gains. Governance remains weak. Priorities are misplaced and corruption persists.
Civil society voices go further. They say the inflow surge expanded the “opportunity set” for political spending. This expansion was greater than the expansion of public services.
The recurring complaint is visibility. Citizens do not see commensurate improvements in primary healthcare or school rehabilitation. Rural roads, water supply, and power support schemes remain unchanged. There is also little progress in farm-to-market logistics or public transport.
Opposition parties across several states echo the same theme. Ruling parties counter-argue that salary payments, selected road projects, and flagship infrastructure prove that development is happening.
Yet the credibility gap persists for a reason. In many states, households experience the state not through press releases. Instead, they encounter queues at health centres, collapsed classrooms, and insecurity on feeder roads. They also face levies imposed on small traders and the inability of young people to find decent work.
When inflation is high, the threshold for “felt impact” rises. If a state completes a road project, the citizen’s lived experience can still be that nothing improved. This can happen if rent, transport, and food prices have doubled.
The Structural Problem: FAAC Dependency Crowds Out Ambition
BudgIT’s subnational fiscal analysis has repeatedly highlighted how dependent most states remain on federation transfers.
The latest edition underscores that many states rely heavily on FAAC for recurrent revenue. Only a few relative outliers show stronger internally generated revenue performance.
This dependence creates perverse incentives.
When easy money rises, some states relax the difficult work of building sustainable local revenue and supporting productive enterprise.
States default to the federation cheque. They do this instead of simplifying permits, digitising land administration, and widening the property tax base fairly. Additionally, they miss strengthening consumption and hospitality taxes transparently and attracting investment into agro-processing and light manufacturing.
The result is a low-innovation fiscal culture. States that should compete to grow jobs end up competing for allocations and political leverage in Abuja.
Even where IGR rises, businesses often complain about the method: multiple taxation, informal levies, enforcement-heavy revenue drives and regulatory harassment.
This is the worst of both worlds. The state remains FAAC-dependent while still squeezing small businesses in a way that discourages expansion and formal job creation.
Where the Windfall Goes: Recurrent Spending, Debt, and “Visibility Projects”
A windfall does not automatically translate into capital formation.
A large part of state spending is structurally recurrent. This includes salaries, pensions, and overheads. It also covers political appointees and the running costs of ministries, departments, and agencies.
When wage negotiations intensify and arrears accumulate, governors face pressure to prioritise payroll over projects. That can be defensible, but only if the balance does not permanently crowd out capital investment.
Debt is another sinkhole. Many states carry domestic debt burdens and external obligations, often backed by federal guarantees or structured around refinancing. Rising inflows can go straight into debt servicing, leaving little room for new economic infrastructure.
Then there are “visibility projects” that do not raise productivity.
Beautification, ceremonial gateways, roundabouts, street fencing, and prestige buildings may look like development. Yet, they often create limited long-term jobs. In contrast, investments in irrigation, health systems, and basic education quality offer more sustainable employment opportunities. Market logistics, industrial power clusters, and enterprise parks tied to skills pipelines also provide these opportunities.
This is why the debate has become so sharp. States can truthfully point to completed projects. Critics, however, can truthfully argue that the projects do not change livelihoods at scale.
The Transparency Trap: Citizens Can’t Follow the Money
A critical weakness is the limited ability of citizens and local media to trace allocations from receipt to expenditure.
Some states publish budgets more consistently than others. They also release quarterly budget implementation reports and procurement information. Reform programmes have tried to incentivise better disclosure.
But procurement remains a major opacity zone. Contract awards, unit costs, and variations are often hard to access. Mobilisation payments, delivery verification, and maintenance plans are also difficult to obtain.
When transparency is weak, the market becomes distorted.
Legitimate contractors are crowded out by politically connected firms. Projects are over-priced. Payments are delayed. Quality falls. Small suppliers bear the brunt. This includes cement distributors and local logistics operators. They lack the political leverage to be paid on time.
For business, this is not a moral debate. It is cash-flow reality. A state that delays contractor payments becomes a state that destroys working capital and raises the cost of doing business.
What This Means for Business, Money, Jobs and Opportunity
1) State spending can create jobs, but only if it is structured for local value.
A ₦9tn inflow environment should lead to predictable pipelines of construction and maintenance. This includes school upgrades, health supply contracts, agricultural extension services, and SME procurement.
When procurement lacks transparency and payment cycles are uncertain, private sector players respond in two ways. They either price the risk into their contracts or avoid state business entirely. That reduces competition and raises costs.
2) Poor spending choices worsen inflationary pressure at the local level.
If windfalls fuel politically motivated consumption and non-productive contracts, they can amplify local price pressures without improving supply.
Conversely, spending that reduces logistics bottlenecks can lower the cost of moving goods. Expanding water access and supporting cold-chain infrastructure also contribute. Upgrading feeder roads helps stabilize prices over time.
3) Investors now look at “state capability” as much as they look at incentives.
Tax holidays and MoUs mean little. Land administration is chaotic. Permits are slow. Levies are unpredictable, and infrastructure is unreliable.
The FAAC windfall moment is an opportunity for states to prove their capabilities. States can fund the basics that investors care about. These include roads that last, security coordination, fast-track permits, dispute resolution, and transparent procurement.
4) Job creation requires human capital spending that survives politics.
Education and primary healthcare are core state responsibilities. States that use windfalls to improve teacher quality create a healthier workforce. They also enhance vocational training and digital skills. Additionally, improving maternal and child health builds a more employable workforce. That attracts private investment and creates a virtuous cycle of IGR. States that do not will remain dependent.
5) The biggest opportunity is to convert volatile transfers into durable revenue engines.
Economists warn that FAAC revenues are volatile and outside state control. That is the point. Windfalls should fund projects that generate future revenue. These projects include industrial clusters, market redevelopment tied to fees and services, and land titling systems. These systems should expand the property tax base fairly. Additionally, PPP-ready infrastructure that crowds in private capital is important.
A Practical Reform Agenda That Could Change the Story
If the governors want to win this argument, they need to move from press statements to measurable commitments.
Ring-fence capital spending with publishable milestones.
Set clear quarterly targets for roads, schools, PHCs, water and agricultural logistics, and publish progress with verifiable locations and contractors.
Make procurement readable, searchable and complete.
Not just budget PDFs. Contract awards, unit costs, timelines, variations, delivery verification and maintenance plans should be public.
Pay contractors on time and stop killing local supply chains.
Late payment is a silent job destroyer. States that pay promptly will attract better contractors, better pricing, and more local investment.
Reward IGR growth without strangling business.
IGR should grow through digitisation, base expansion and service improvements, not through harassment and multiple levies. If taxpayers see services, compliance improves.
Adopt “counterpart incentives” tied to reforms.
The argument for linking benefits to IGR performance is gaining traction. A system that rewards reform and penalises waste could shift behaviour across the federation.
The Political Economy of 2027 and the Risk to Growth
A pointed civil society warning is that the windfall is being absorbed into political manoeuvring ahead of 2027. The risk is real, even if it’s not universally true. Election cycles often reallocate spending. They shift resources away from long-term productivity towards short-term political visibility.
For businesses, that means heightened uncertainty: abrupt policy shifts, surprise levies, delayed payments, and stalled projects once political priorities change.
Yet there is also a window.
The same inflows that can be wasted can also be used to build an investable subnational Nigeria. In this Nigeria, states compete to attract factories, agribusiness, fintech back offices, logistics hubs, and tourism value chains.
If a handful of states show credible fiscal discipline and transparent project delivery, capital will follow. Others will be compelled to imitate.
The ₦9tn question, then, is not only where the money went.
The question is whether states will continue to treat FAAC as a lifeline. Alternatively, will they treat it as seed capital for jobs, productivity, and a new growth model that Nigerians can actually feel?
Follow us on our broadcast channels today!
- WhatsApp: https://whatsapp.com/channel/0029VawZ8TbDDmFT1a1Syg46
- Telegram: https://t.me/atlanticpostchannel
- Facebook: https://www.messenger.com/channel/atlanticpostng
