Surging FAAC Inflows Drive States, Local Governments to Cut Bank Debts by ₦547.5 Billion in One Year

State governments and local government councils across Nigeria significantly reduced their outstanding bank loans by about ₦547.52 billion within one year, reflecting a notable shift in sub-national public finance driven largely by sharply increased inflows from the Federation Account Allocation Committee (FAAC). This development, revealed by findings from Saturday PUNCH and official Central Bank of Nigeria (CBN) data, highlights how improved revenue conditions and high borrowing costs have pushed states and councils to deleverage aggressively.

According to the CBN’s latest Quarterly Statistical Bulletin, the banking sector’s total “claims on state and local governments” declined from ₦2.68 trillion in June 2024 to ₦2.13 trillion in June 2025. This represents a year-on-year reduction of about 20.4 per cent in the combined bank exposure to sub-national governments, signalling a deliberate effort by states and councils to repay debts rather than accumulate new obligations.

A closer look at the monthly figures shows that the repayment trend began earlier. In January 2024, banks’ claims on states and local governments stood at ₦2.73 trillion. By January 2025, this figure had fallen to ₦2.44 trillion, indicating that roughly ₦292 billion had been cleared within twelve months. Although there was a brief uptick in February 2025, when exposure rose to ₦2.59 trillion, the balance eased again in March to ₦2.55 trillion and stabilised around ₦2.44–₦2.45 trillion in April and May.

The most dramatic adjustment came in June 2025, when outstanding bank claims plunged to ₦2.13 trillion. Month-on-month, this represented a sharp reduction of about ₦313 billion from May’s level, marking the single largest decline during the year. Analysts interpret this steep drop as an aggressive end-of-quarter effort by sub-national governments to unwind costly bank obligations amid persistently high interest rates.

Throughout 2024, the CBN’s Monetary Policy Committee (MPC) pursued an aggressive tightening stance, raising the Monetary Policy Rate (MPR) from 18.75 per cent at the beginning of the year to about 27.50 per cent by November. The goal was to tame inflation and stabilise the naira, but the consequence was a sharp increase in borrowing costs. In 2025, the MPC largely maintained the 27.50 per cent benchmark, before making its first rate cut in five years in September, trimming the MPR to 27.00 per cent as inflationary pressures showed signs of easing. Despite this modest easing, borrowing costs remained elevated, reinforcing incentives for states and councils to reduce bank exposure.

Crucially, the debt reduction coincided with a surge in statutory allocations. Data from the Office of the Accountant-General of the Federation show that states and local governments jointly received ₦12.67 trillion in FAAC allocations in 2025, up from ₦8.96 trillion in 2024. This ₦3.71 trillion increase represents a 41.4 per cent year-on-year jump, excluding the 13 per cent derivation fund. When derivation is included, total inflows to states and councils rose from ₦10.31 trillion in 2024 to ₦14.28 trillion in 2025—an increase of ₦3.98 trillion, or 38.6 per cent.

State governments were the biggest beneficiaries in absolute terms, with their FAAC share rising from ₦5.19 trillion in 2024 to ₦7.31 trillion in 2025. Local government councils also saw allocations climb sharply, from ₦3.77 trillion to ₦5.35 trillion over the same period. Monthly data underline the scale of the shift, with states and councils rarely receiving below ₦498 billion and ₦387 billion respectively in any month of 2025, compared with much lower ranges in 2024.

Despite these record inflows, concerns about fiscal sustainability persist. The Nigeria Extractive Industries Transparency Initiative (NEITI) has warned that some states with heavy debt burdens still rank low in FAAC receipts but high in debt deductions, raising red flags about their debt-to-revenue ratios. Similarly, the Director-General of the Debt Management Office, Patience Oniha, has urged states to prioritise revenue generation and Public-Private Partnerships over borrowing.

Overall, the ₦547.5 billion debt repayment underscores how stronger revenues and tight monetary conditions have reshaped sub-national fiscal behaviour. While the trend points to improved financial discipline, experts caution that sustained reforms, transparency, and efficient use of allocations will be essential to ensure long-term fiscal health for states and local governments.