States and local government councils reduced their bank borrowings by about N547.52bn within one year as inflows from the Federation Account Allocation Committee increased significantly, according to findings by The PUNCH.

Data obtained from the Central Bank of Nigeria’s latest Quarterly Statistical Bulletin show that the banking sector’s claims on state governments and local councils declined from N2.68tn in June 2024 to N2.13tn in June 2025.

This indicates that sub-national governments collectively cut their indebtedness to commercial and merchant banks by 20.4 per cent on a year-on-year basis.

Further analysis of the data reveals that in January 2024, banks’ total exposure to states and local government councils stood at N2.73tn.

By January 2025, the figure had declined to N2.44tn, showing that about N292bn in bank loans was repaid within the one-year period.

The outstanding balance rose slightly in February 2025 to N2.59tn before easing to N2.55tn in March 2025.

By April and May 2025, bank exposure to states and councils stabilised at between N2.44tn and N2.45tn.

In June 2025, however, the balance fell sharply to N2.13tn, representing the largest single-month reduction recorded during the year.

On a year-on-year basis, June marked the most significant shift, as banks were owed N2.68tn by states and councils in June 2024, but the amount dropped by more than half a trillion naira by June 2025.

Month-on-month figures also show that the decline from N2.45tn in May 2025 to N2.13tn in June 2025 amounted to about N313bn.

This points to an aggressive effort by sub-national governments to reduce bank obligations at the end of the second quarter, amid elevated interest rates and rising FAAC allocations.

It was observed that throughout 2024, the Central Bank of Nigeria’s Monetary Policy Committee pursued aggressive monetary tightening.

During the year, the MPC raised the Monetary Policy Rate from 18.75 per cent at the beginning of 2024 to about 27.50 per cent by November through successive rate hikes aimed at curbing inflation and stabilising the exchange rate.

In 2025, the committee largely maintained the benchmark rate at 27.50 per cent for most of the year, signalling a cautious pause following the earlier tightening cycle as inflationary pressures began to ease.

However, in September 2025, the MPC implemented its first rate cut in five years, reducing the MPR to 27.00 per cent in response to moderating inflation and a gradual shift towards supporting broader economic activity.

By November 2025, the CBN retained the 27.00 per cent policy rate, balancing disinflation objectives with financial stability concerns, as borrowing costs remained high but slightly more accommodative.

The persistently high interest rate environment likely encouraged states and local councils to reduce borrowing as FAAC inflows increased substantially.

Further examination of FAAC records shows that combined allocations to states and local government councils rose sharply in 2025 compared with 2024, reflecting the scale of revenue inflows into the federation account.

Figures from the Office of the Accountant-General of the Federation indicate that states and local governments jointly received N12.67tn in 2025, up from N8.96tn in 2024.

These figures exclude the 13 per cent derivation fund for oil-producing states.

The increase of N3.71tn represents a 41.4 per cent year-on-year rise in statutory allocations to the two tiers of government.

When the 13 per cent derivation fund is included, the increase remains substantial.

States and councils together received N14.28tn in 2025, compared with N10.31tn in 2024, representing an additional N3.98tn or about 38.6 per cent more than the previous year.

The derivation component alone rose from N1.35tn in 2024 to N1.62tn in 2025.

A closer breakdown shows that state governments benefited the most in absolute terms.

State governments’ FAAC allocations increased from N5.19tn in 2024 to N7.31tn in 2025, an increase of N2.13tn or 41 per cent year-on-year.

Local government councils recorded a similar trend, with allocations rising from N3.77tn in 2024 to N5.35tn in 2025, representing an increase of N1.58tn or 41.8 per cent.

Monthly figures also reflect the consistent upward movement in allocations.

In January 2024, states received N396.69bn, but this rose to N498.50bn in January 2025.

Allocations continued to increase during the year, peaking at N727.17bn for states in October 2025.

The year ended with states receiving N601.73bn in December 2025, compared with N549.79bn in December 2024.

Local government councils recorded a similar pattern.

Councils received N288.93bn in January 2024, rising to N361.75bn in January 2025.

Allocations crossed the N500bn mark in the final quarter of 2025, reaching a peak of N529.95bn in October 2025.

By December 2025, councils received N445.27bn, higher than the N402.55bn shared in December 2024.

In 2024, allocations to local governments largely ranged between N267bn and N294bn during the first half of the year, while state allocations were mostly between N366bn and N403bn.

In contrast, 2025 figures show that councils rarely received below N387bn in any month, while state allocations seldom fell below N498bn.

Overall, total FAAC allocations to all three tiers of government rose from N13.91tn in 2024 to N20.28tn in 2025.

Total distributable revenue, including derivation, increased from N15.26tn to N21.89tn during the same period, with states and councils accounting for the bulk of the increase.

The surge in inflows appears to be closely linked to the decline in bank debt among states and local councils.

In a recent statement, the acting Director of Communication and Stakeholders Management at the Nigeria Extractive Industries Transparency Initiative, Mrs Obiageli Onuorah, noted that a report by the agency highlighted the financial pressure faced by states due to debt repayments, despite record FAAC disbursements.

According to the statement, the report revealed that several states with heavy debt burdens also ranked lower in FAAC allocations, raising concerns about their fiscal sustainability and capacity to finance critical development projects.

“The report noted that many states with high debt ratios were in the lower half of the FAAC allocation rankings but ranked higher for debt deductions, raising concerns about their debt-to-revenue ratios and overall fiscal health,” the statement read.

Meanwhile, the Director-General of the Debt Management Office, Ms Patience Oniha, has called on state governments to prioritise alternative funding options and revenue generation over borrowing.

She made the call during a one-day workshop in Lagos organised under the States Action on Business Enabling Reforms Programme, with support from the World Bank.

Oniha said, “Borrowing should not be the major way to source funds. You must increase your revenues by increasing your tax revenues.

“Public-private partnerships can help improve Nigeria’s economy by attracting private sector investment and expertise to develop infrastructure and deliver public services. This reduces the financial burden on the government, accelerates project delivery, and often results in higher quality outcomes. PPPs can also create jobs, stimulate local businesses, and foster innovation.”