Nigeria’s federation revenues surged to ₦84 trillion over the past three years, but 41% of these earnings were lost to pre-distribution deductions—substantially reducing the funds ultimately shared among the federal, state, and local governments, according to findings by The PUNCH.
Latest data from the World Bank’s Nigeria Development Update, reviewed by our correspondent, shows that gross revenues increased from ₦17.08 trillion in 2023 to ₦29.45 trillion in 2024 and ₦37.44 trillion in 2025, totaling ₦83.97 trillion over the period.
However, deductions from the Federation Account also soared—from ₦6.22 trillion in 2023 to ₦13.38 trillion in 2024 and ₦14.93 trillion in 2025—amounting to a combined ₦34.53 trillion across three years. This means about 41.1% of total revenues were withheld at source before distribution, significantly shrinking the pool shared among all tiers of government.
This trend comes amid mounting fiscal pressures, a widening budget deficit, and an increased reliance on borrowing, which has pushed Nigeria’s public debt to $110.3 billion (or about ₦159.2 trillion) as of December 31, 2025—raising concerns over debt sustainability and serviceability.
The World Bank report highlights that these escalating first-line deductions from the Federation Account are quietly eroding revenues available to the federal, state, and local governments, despite the overall revenue boost from recent economic reforms.
In its latest Nigeria Development Update, titled Nigeria’s Tomorrow Must Start Today: The Case for Early Childhood Development, the World Bank warns that allocations to key government agencies now consume a significant portion of national revenues before funds are distributed, thereby shrinking the fiscal space available for development.
A breakdown of the figures reveals deductions accounted for 36.4% of revenue in 2023, spiked to 45.4% in 2024, and moderated slightly to 39.9% in 2025. While revenues grew by 72.4% between 2023 and 2024, and by 27.1% between 2024 and 2025, deductions increased even faster—jumping 115.1% between 2023 and 2024, and 11.6% between 2024 and 2025.
The main drivers of these deductions were increased transfers to Ministries, Departments, and Agencies (MDAs) funded through fixed percentages of gross revenue. These agencies include the Nigerian Upstream Petroleum Regulatory Commission, Nigerian Midstream and Downstream Petroleum Regulatory Authority, Nigeria Customs Service, Nigerian National Petroleum Company Limited, among others.
By 2025, some agencies were receiving more funds than several Nigerian states. The World Bank notes that, despite improved revenue performance following the removal of petrol subsidies and foreign exchange reforms, much of these gains are diverted by the deduction structure.
The report states: Large FAAC deductions to MDAs significantly reduce net revenues available to the federation… FAAC first-line deductions to federal MDAs have increased sharply, reducing net distributable revenues and altering the balance of fiscal resources across the federation.
Transfers to MDAs for collection costs and refunds rose from ₦1.88 trillion in 2023 to ₦4.18 trillion in 2025. Refunds to subnational governments and other statutory obligations also jumped from ₦1.52 trillion in 2023 to ₦6.87 trillion in 2024, moderating to ₦4.57 trillion in 2025.
By 2025, the scale of deductions meant some agencies received more than the average state’s total revenue, even surpassing budget allocations to major social and growth-oriented ministries. This limited the government’s capacity to fund infrastructure and development projects.
The World Bank warns that these pre-distribution deductions compress the fiscal space for all government levels and reduce transparency, as a growing share of federation resources is effectively pre-committed.
Despite a broader improvement in Nigeria’s revenue profile—especially from non-oil sources, with state revenues rising from ₦12.1 trillion in 2024 to ₦15.4 trillion in 2025—these gains are being undermined by increasing deductions and federal spending pressures.
The report explains: “While revenue administration has strengthened, the increase reflects higher nominal revenues from subsidy removals. Because many deductions are set as fixed percentages, the revenue windfall automatically led to larger MDA transfers. In 2025, total FAAC transfers to these MDAs exceeded the revenues of many Nigerian states, and several individual agencies received more than the average state’s total revenue. These deductions also surpassed budget allocations to major social and growth-oriented ministries. As many of these charges are applied before revenue distribution, a growing share of federation resources is effectively pre-committed, reducing transparency and compressing fiscal space for the three tiers of government.”
Despite higher revenues, the federal government’s fiscal deficit remained high at about 3.8% of GDP in 2025 (₦16.9 trillion), as recurrent expenditure offset revenue growth. Total government spending rose to about ₦29.7 trillion, driven by higher personnel costs, rising debt servicing, and large off-budget deductions for special interventions, including ₦1.1 trillion for military spending and ₦900 billion for the Renewed Hope programme. Capital expenditure fell from ₦5.5 trillion in 2024 to ₦4.5 trillion in 2025, with only 24% of the approved capital budget implemented, limiting the impact on economic growth.
The World Bank also highlights structural weaknesses in Nigeria’s budgeting process, including delayed approvals and lack of transparency. The absence of a comprehensive budget law has led to delays, unrealistic projections, and reduced predictability.
Aliyu Ilias, CEO of CSA Advisory and a development economist, echoed the World Bank’s concerns, warning that the structure of first-line deductions to MDAs undermines fiscal discipline and budget transparency. He argued that direct access to revenue by MDAs enables unaccounted spending and distorts the national budget process, creating a parallel spending structure outside formal oversight. “It’s wrong for MDAs to get revenue at source, and many projects are not captured in the budget. 41% is too high as a deduction from source,” Ilias said.
He described the situation as a structural weakness in Nigeria’s public finance management, stressing that the scale of deductions—about 41% of total revenues—raises serious concerns for fiscal sustainability. While the current structure may offer administrative convenience for agencies, it reduces the pool of funds available for distribution and development spending.
Ilias also expressed skepticism about the likelihood of full implementation of reform proposals, citing entrenched institutional interests. He called for a return to a structured fiscal framework based on clear revenue rules, budget discipline, and transparent allocation processes.
He noted that state governors are increasingly aware of the impact of rising deductions, which may strengthen their demands for greater fiscal allocation. Without reforms, he warned, Nigeria risks deepening fiscal fragmentation, straining the Federation Account and weakening development planning.
Meanwhile, the World Bank is calling for a major overhaul of Nigeria’s revenue retention framework, warning that continued use of fixed percentage deductions for MDAs undermines fiscal efficiency and reduces funds available for national development. The Bank recommends rationalizing cost-of-collection arrangements and shifting all MDA financing to transparent budget appropriations.
Currently, several federal agencies are funded directly from gross revenue collections through statutory deductions, such as 4% of non-oil revenues and royalties to the Federal Inland Revenue Service, 7% of customs collections to the Nigeria Customs Service, 0.5% of non-oil revenues to the Revenue Mobilisation, Allocation and Fiscal Commission, and 3% of VAT to the North East Development Commission. These arrangements, while ensuring predictable funding, now challenge fiscal discipline.
The World Bank argues that fixed percentage deductions directly reduce distributable revenues, limiting resources for infrastructure, health, education, and other priorities. The report recommends a gradual transition to funding all revenue agencies and regulatory bodies through explicit budget appropriations, subject to annual legislative approval, oversight, and audit.
Phasing out excessive cost-of-collection rates and earmarked deductions would immediately increase net inflows to FAAC, boosting revenues across all government levels. The report also calls for greater transparency, including publication of audited financial statements and stronger independent oversight.
If implemented, these reforms could significantly improve fiscal efficiency and increase funds available for infrastructure and social investment throughout Nigeria.
