State governments are heading into 2026 with expansive spending plans, but weak internally generated revenue is compelling many of them to depend heavily on federal transfers, borrowing, and temporary inflows to finance their budgets, according to an analysis by The PUNCH.

A review of appropriation bills and approved estimates across several states indicates that only a few can fund a substantial portion of their expenditure from internally generated revenue, raising fresh concerns about the sustainability of planned capital projects.

The analysis shows that most governors remain fiscally dependent on Abuja, the nation’s administrative capital. Federally shared revenue from the Federation Accounts Allocation Committee continues to be the largest and most predictable funding source for states, supplemented by value-added tax distributions and, in oil-producing states, derivation proceeds.

Lagos State, Nigeria’s commercial capital, plans to spend N4.237tn in 2026, making it the largest subnational budget ever proposed. Governor Babajide Sanwo-Olu said the budget, anchored on his administration’s T.H.E.M.E.S.+ agenda, would be funded mainly through N3.12tn in internally generated revenue and federal transfers, with the balance sourced from bonds and loans. Despite Lagos’s strong tax base, which rivals that of some smaller African countries, borrowing remains necessary to close the funding gap.

Abia State faces a more challenging fiscal outlook. Governor Alex Otti proposed a N1.016tn budget, with N811.8bn, representing 80 per cent, allocated to capital expenditure, while N204.4bn, or 20 per cent, is set aside for recurrent spending.

The state expects to generate N83.2bn from FAAC allocations, N67.1bn from VAT, N26.5bn from grants and aid, and N168bn from other federal revenue channels, bringing total projected revenue to N607.2bn.

This leaves a deficit of N409bn, equivalent to about 40 per cent of the budget. While Abia’s recurrent expenditure is projected to be fully funded through internally generated revenue, the execution of capital projects will rely heavily on federal allocations, grants, and borrowing.

The Managing Director of Optimus by Afrinvest, Dr Ayodeji Ebo, warned that the heavy dependence on federal transfers, borrowing, and temporary inflows poses a significant threat to fiscal sustainability.

“These revenues are volatile and largely outside state control, making budgets vulnerable to oil price shocks. Over time, this approach also discourages ingenuity, as states become dependent on external inflows rather than building durable local revenue sources,” the economist told our correspondent.

Ogun State reflects a similar pattern. Its N1.669tn “Budget of Sustainable Legacy” relies on multiple funding streams. Internally generated revenue from the state and its ministries, departments, and agencies is projected at N509.88bn, while federal transfers, including statutory allocations and VAT, are expected to contribute N554.81bn.

In addition, N518.9bn is projected from capital receipts, comprising internal and external loans as well as grants. Although the budget appears balanced on paper, more than 30 per cent of the funding is expected to come from non-recurring sources.

Enugu State’s N1.62tn budget represents a 66.5 per cent increase compared with its 2025 appropriation. Capital expenditure is pegged at N1.296tn, accounting for 80 per cent, while recurrent spending stands at N321.3bn, or 20 per cent.

The state projects N870bn from internally generated revenue, N387bn from federal allocations, and N329bn from capital receipts such as loans and grants. Analysts note that about 20 per cent of Enugu’s planned spending depends on non-recurring funds, underscoring its reliance on external financing to implement development programmes.

Dr Ebo cautioned that limited IGR underscores the urgent need for reform, urging states to strengthen local revenue sources, attract investment, and leverage public-private partnerships. “Fiscal sustainability will come not from higher transfers or more debt, but from productive local economies and broader tax bases.”

Osun State approved a N723.45bn budget, with recurrent revenue projected at N421.25bn, capital receipts at N286.01bn, and an opening balance of N16.19bn. Although total projected inflows match the size of the budget, a sizeable portion comes from capital receipts, which are uncertain, making budget implementation dependent on successful fund mobilisation.

Oil-producing Delta State is banking on stronger federal inflows following the removal of fuel subsidy. The state plans a N1.664tn budget, allocating N1.165tn, or 70 per cent, to capital expenditure, while N499bn, representing 30 per cent, is earmarked for recurrent spending.

Delta expects N720bn from statutory allocations and mineral derivation, alongside N250bn from internally generated revenue, which the governor anticipates will rise following reforms in revenue collection and subsidy removal. Despite these measures, the state remains heavily dependent on federal transfers and oil-related revenue to fund its spending plans.

Sokoto State’s N758.7bn “Budget of Socio-Economic Expansion” depends on N389.3bn from FAAC, N74.5bn from internally generated revenue, and N233.8bn from grants, aid, and capital development funds. With less than 10 per cent of projected revenue coming from IGR, the state relies extensively on federal transfers and donor funding for both recurrent and capital expenditure.

Fiscal expert Aliyu Ilias said subnational governments are contributing to challenges within the federation through the way they manage FAAC allocations. He proposed that the federal government consider “counterpart funding,” where states that improve their IGR performance receive proportional benefits, warning that without such incentives, states will continue to rely heavily on Abuja.

Ilias also cautioned that although FAAC allocations are at record levels, they are not necessarily translating into improved living standards. He recommended that the federal government place greater emphasis on executing projects directly at the local government level rather than channelling funds through states, to ensure that resources reach citizens more effectively.

Edo State’s N939.85bn budget is funded through a mix of revenue sources, including N160bn from IGR, N480bn from FAAC, N153bn from grants and capital receipts, and N146bn from public-private partnerships. Despite this diversification, a substantial portion of the budget depends on external funds and partnerships, exposing the state to potential delays if these inflows fall short.

Bayelsa State, another oil-dependent economy, plans to spend N1.01tn after lawmakers increased the governor’s initial proposal. Projected revenue includes N42.2bn from statutory allocations, N84bn from VAT, N212.6bn from the 13 per cent derivation fund, N488bn from other FAAC allocations, N85.9bn from internally generated revenue, N24.9bn in grants, and N50bn from domestic loans.

With less than 10 per cent of Bayelsa’s projected revenue coming from IGR, the state remains heavily reliant on oil-linked federal allocations, borrowing, and grants to support its spending programme.

Gombe State’s N535.7bn “Budget of Consolidation” allocates N371.44bn, or 69.3 per cent, to capital expenditure and N164.25bn, representing 30.6 per cent, to recurrent spending. Recurrent revenue is projected at N416.1bn, capital receipts at N225.5bn, and a carryover balance of N100bn, with major projects dependent on non-recurring funds.

Kwara State’s N644.004bn “Consolidation and Sustained Growth” budget earmarks N424.7bn for capital projects and N219.3bn for recurrent expenditure. Revenue assumptions are based on an oil price benchmark of $64.85 per barrel, daily oil production of 1.84 million barrels, an exchange rate of N1,400 per dollar, and projected GDP growth of 4.68 per cent, making the budget highly sensitive to national economic conditions and federal transfers.

Experts say states must look inward and build on areas of comparative advantage such as agriculture, manufacturing, tourism, logistics, and services. “Attracting investment requires reliable infrastructure, streamlined regulation, land access, and predictable tax policies.”

“Stronger public-private partnerships and regional collaboration can unlock capital and efficiency, reducing over-reliance on borrowing,” Ebo stated. “Ultimately, fiscal sustainability will come not from higher transfers or more debt, but from productive local economies, broader tax bases, disciplined spending, and smarter collaboration.”

Analysts note that only a few states, including Osun and Ogun, have budgets that align closely with projected revenues, and even these depend significantly on capital receipts and loans. Most other states have planned recurrent and capital spending well beyond guaranteed internally generated revenue, relying instead on federal allocations, grants, loans, and donor support.

According to Ilias, projected total revenue across states could reach N35tn, but shortfalls are likely to affect capital expenditure, as recurrent obligations such as salaries and debt servicing must take priority. He stressed that fiscal discipline and strict adherence to a January-to-December budget cycle are essential for efficient budget execution and effective prioritisation of spending.

A total of 34 state governors have presented their 2026 budget proposals to their respective Houses of Assembly. Governors Babagana Zulum of Borno State and Siminalayi Fubara of Rivers State are yet to submit their appropriation bills for legislative approval.