BudgIT Report: States Increasingly Relying on Federal Allocations to Meet Operating Expenses

James Emejo in Abuja

All the 36 states of the federation managed to raise enough revenues, including Internally Generated Revenue (IGR), federal allocations, aid, and grants to fully cover their recurrent expenditures, a new report has affirmed.
According to the BudgIT 2024 State of States Report, with the theme, “Moving Healthcare Delivery from Suboptimal to Optimal”, which was launched yesterday in Abuja, only Rivers and Lagos generated more than enough IGR to cover their operating expenses, with IGR to operating expense ratios of 121.26 per cent and 118.39 per cent, respectively.
Several other states, including Ogun, Anambra, Cross River, Kwara, Kaduna, and Edo managed to generate IGR sufficient to cover at least 50 per cent of their operating costs, with the rest relying on federal transfers.
The report further revealed that Akwa Ibom, Imo, Taraba, Yobe, Bayelsa, and Jigawa required over five times their IGR to meet operating expenses, highlighting significant dependence on FAAC revenues and aid and grants.
“This indicates that no state needed to borrow to fund any portion of its recurrent spending,” the report noted.
According to the report, the combined revenue of all states increased significantly by 31.2 per cent in the 2023 fiscal year from N6.6 trillion in 2022 to N8.66 trillion.
The growth rate exceeded the previous year’s increase of 28.95 per cent, indicating a notable improvement in fiscal performance.
Of the total revenue generated in 2023, Lagos contributed N1.24 trillion, representing 14.32 per cent of the cumulative revenue of the 36 states.
Gross FAAC, which grew by 33.19 per cent from N4.05 trillion in 2022 to N5.4 trillion in 2023, contributed to 65 per cent of the year-on-year growth of the combined revenue of the states, the report noted, adding that the increase indicated additional revenue accrual to states, albeit moderate, due to discontinuing the petroleum subsidy.
Specifically, it noted that 32 states relied on FAAC receipts for at least 55 per cent of their total revenue, while 14 states relied on FAAC receipts for at least 70 per cent of their total revenue.
In addition, transfers to states from the federation account comprised at least 62 per cent of the recurrent revenue of 34 states, except Lagos and Ogun, while 21 states relied on federal transfers for at least 80 per cent of their recurrent revenue.
Head of Research and Policy Advisory, BudgIT, Iniobong Usen, said, “The picture painted above buttresses the over-reliance of the state governments on federally distributable revenue and accentuates their vulnerability to crude oil-induced shocks and other external shocks.”
He said, “The fiscal viability and long-term sustainability of states heavily depend on their capacity to mobilise revenues internally by effectively leveraging their natural resource endowments, technology, public-private partnerships, human capital, and effective consequence management.
“This capacity is crucial for financing essential infrastructure, investing in human capital development and social protection, meeting the new minimum wage and its consequential adjustments, and repairing the fractured social contract.
“To achieve debt sustainability, states must also curb their reliance on foreign loans, especially in light of exchange rate volatility and shrinking fiscal space, to minimise exposure to unfavourable exchange rates.”
However, he said states should establish robust frameworks for debt transparency and accountability, ensuring that borrowed funds are allocated to high-impact projects with clear economic returns.
Contry Director, BudgIT Foundation, Mr. Gabriel Okeowo, said the report was a valuable asset in a dispensation where states seemed to have access to more resources as well as the need for transparency and accountability in the utilisation of the revenues.
He said, “For example, the combined revenue of all 36 states in Nigeria increased significantly by 31.2 per cent from N6.6 trillion in 2022 to N8.66 trillion. So, there is a pressing need to assess how the states are managing their resources to improve the lives of their people.
 Okeowo said the report aimed to spark a conversation about the need for subnational governments to prioritise resource management and investments in critical sectors, such as health.
The report further noted that total expenditure across all 36 states reached N9.78 trillion, marking a 21.19 per cent increase from the previous year’s N8.07 trillion.
Lagos led the spending, disbursing over N1.49 trillion, which accounted for 15.23 per cent of the overall subnational expenditure.
“The year saw different growth rates across spending categories, with personnel costs rising by an average of 12.9 per cent, overhead costs by 26.75 per cent, and capital expenditure seeing the most significant increase at 37.30 per cent.
“Personnel cost rose to N1.99 trillion from N1.75 trillion in 2022, while overhead expenses climbed to N1.52 trillion from N1.24 trillion, and capital expenditure increased to N4.04 trillion, up from N3.47 trillion the previous year,” the report added.
The report further disclosed that aggregate operating expenses of the states, which formed 47.36 per cent of aggregate expenditure increased by 21.17 per cent from N3.8 trillion in 2022 to N4.64 trillion in 2023.
In addition, N1.25 trillion, representing 12.8 per cent of the cumulative spending of the states, was used to service debts.

Interestingly, N287.56 billion, not captured by states as part of their expenditure for the 2023 fiscal year, was utilised to offset contractor arrears, pension and gratuity arrears, and other outstanding liabilities, the report further revealed.

The total debt stock of the 36 states surged by 38.1 per cent from N7.25 trillion in 2022 to N10.01 trillion, partly driven by a N606.12 billion increase in domestic debt, resulting in an average year-on-year growth rate of 11.4 per cent.

As of December 31, 2023, the total domestic debt stood at N5.86 trillion, it stated.

“The situation was further complicated by rising foreign debt, which increased by 4.1 per cent, from $4.43 billion in 2022 to $4.61 billion in 2023. The liberalisation of the exchange rate exacerbated the financial strain on states, significantly raising their foreign loan repayment obligations in Naira terms,” it added.

According to BudgIT, Lagos remained the most indebted in foreign currency, accounting for 26.9 per cent of the total foreign debt, equivalent to $1.24 billion.

Further analysis of the debt landscape revealed a considerable variance of N2.74 trillion in debt repayment obligations when comparing the exchange rate shift from N899.39 per dollar as of December 31, 2023, to the new rate of N1,492.9 as of June 2024.

It noted that the devaluation exposed many states to heightened financial risk, particularly the eight states where more than 50 per cent of the total debt is dollar-denominated.

Kaduna and Edo had the highest foreign debt-to-total debt ratios, at 86.06 per cent and 60.54 per cent, respectively. The other states in the group—Ondo, Bauchi, Lagos, Enugu, Ebonyi, and Anambra—had ratios ranging from 50 per cent to 59 per cent.

The debt burden also varied significantly across the country, with the average subnational debt per capita reaching N40,469 in 2023.

Also 12 states exceeded the benchmark, with Lagos having the highest debt per capita at N138,034.

In addition to the existing debt stock, the states have exiting liabilities totalling N1.19 trillion including N408.69 billion owed as arrears to contractor, N521.36 billion in pension and gratuity arrears, N79.64 billion in salary and other staff claims, N4.36 billion in judgement debt and other pending litigation, and N182.79 billion owed to other payables and liabilities.

On health financing, the report said cumulatively, all states allocated N2.3 trillion to the health sector but spent N1.39tn, representing a 58.16 per cent budget performance.

On the purchase of medical equipment, an aggregate of N35.72 billion was spent. However, nine states had no record of expenses for this purchase in their 2023 budget implementation reports.

“Those states include Edo, Ekiti, Katsina, Ogun, Ondo, Osun, Oyo, Yobe and Zamfara,” the report stated.

In addition, N104.27 billion was spent on constructing and rehabilitating hospitals and clinics across the sub-nationals.  On the purchase of drugs and medical supplies, a combined N15.31 billion was spent, excluding Delta, Ebonyi and Niger States, which held no records, it said.

The report stated that “Investments in healthcare are still very far from the ideal and need to be prioritised”.