Nigeria’s federation revenues rose to N84tn over the past three years, but 41 per cent of these earnings was lost to pre-distribution deductions, significantly shrinking what is eventually shared among the three tiers of government, findings by the PUNCH have revealed.

Latest fiscal data obtained from the World Bank’s Nigeria Development Update, analysed by our correspondent on Tuesday, showed that total gross revenues climbed from N17.08tn in 2023 to N29.45tn in 2024 and N37.44tn in 2025, bringing cumulative earnings to N83.97tn within the period.

However, deductions from the Federation Account also surged from N6.22tn in 2023 to N13.38tn in 2024 and N14.93tn in 2025, amounting to a combined N34.53tn over the three years.

This means that about 41.1 per cent of total revenues was deducted at source before distribution to the three tiers of government, reducing their share.

The development comes amid deepening fiscal pressure, a widening budget deficit, and a growing appetite for borrowing, which has significantly pushed Nigeria’s public debt to $110.3bn, equivalent to about N159.2tn as of 31 December 2025, raising concerns about sustainability and debt servicing capacity.

The World Bank in the report said this growing wave of first-line deductions from the Federation Account is quietly eroding the revenues available to federal, state, and local governments, despite a surge in overall earnings driven by recent economic reforms.

In its latest Nigeria Development Update titled ‘Nigeria’s Tomorrow Must Start Today: The Case for Early Childhood Development’, the global lender warned that allocations to key government agencies now consume a significant portion of national revenues before they are even shared, effectively shrinking the fiscal space available for development.

A breakdown further shows that deductions accounted for 36.4 per cent of revenue in 2023, rose sharply to 45.4 per cent in 2024, and moderated slightly to 39.9 per cent in 2025.

The data indicates that while revenues grew 72.4 per cent between 2023 and 2024, and 27.1 per cent between 2024 and 2025, deductions increased even faster, jumping 115.1 per cent between 2023 and 2024, and 11.6 per cent between 2024 and 2025.

The increase in deductions was largely driven by higher transfers to Ministries, Departments and Agencies funded through fixed percentages of gross revenue collections.

These agencies include the Nigerian Upstream Petroleum Regulatory Commission, Nigerian Midstream and Downstream Petroleum Regulatory Authority, Nigeria Customs Service, Nigerian National Petroleum Company Limited, and others.

The report noted that by 2025, some of these deductions had grown so large that individual agencies were receiving more funds than several Nigerian states.

The World Bank noted that while Nigeria’s revenue performance has improved following the removal of the petrol subsidy and foreign exchange reforms, the structure of deductions means that much of the gains are automatically diverted.

The report stated, “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.”

An analysis of the data showed that total deductions rose from N6.22tn in 2023 to N13.38tn in 2024, representing a sharp 115 per cent increase, before climbing further to N14.93tn in 2025, an additional 11.6 per cent rise.

Within this, transfers to MDAs for the cost of collection and refunds surged from N1.88tn in 2023 to N4.18tn in 2025, more than doubling over the period.

Refunds to subnational governments and other statutory obligations also spiked significantly, jumping from N1.52tn in 2023 to N6.87tn in 2024, before moderating to N4.57tn in 2025.

The report stressed that by 2025, the scale of these deductions had become so large that some agencies were receiving more funds than entire states.

“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,” the World Bank noted. “These deductions also surpassed budget allocations to major social and growth-orientated federal ministries.”

The rising deductions also surpassed federal spending on key social and economic sectors, further limiting the government’s ability to fund infrastructure and development projects.

A closer look at the composition of deductions showed that refunds to subnational governments and statutory transfers accounted for a large share, alongside cost-of-collection charges by revenue-generating agencies.

For instance, refunds rose sharply from N1.52tn in 2023 to N6.87tn in 2024, before moderating to N4.57tn in 2025, while cost-of-collection transfers increased steadily to N4.18tn in 2025.

The Washington-based institution warned that because these deductions are applied before revenues are shared by the Federation Account Allocation Committee, a large portion of national income is effectively “pre-committed”.

“A growing share of federation resources is effectively pre-committed, reducing transparency and compressing fiscal space for the three tiers of government,” it added.

The report comes amid a broader improvement in Nigeria’s revenue profile, particularly from non-oil sources.

Data showed that aggregate revenues across states rose from N12.1tn in 2024 to N15.4tn in 2025, driven largely by stronger FAAC inflows linked to higher tax collections and gains from subsidy reforms.

However, the World Bank cautioned that these gains are being undermined by rising deductions and spending pressures at the federal level.

The report explained, “While revenue administration has strengthened, the bulk of the increase reflects higher nominal revenues following the removal of the FX and PMS subsidies. Because many deductions are structured as fixed percentages of gross collections, the revenue windfall automatically translated into proportionally larger transfers to MDAs. 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 FAAC deductions to MDAs also surpassed budget allocations to major social and growth-orientated federal ministries. Because 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 elevated at about 3.8 per cent of GDP in 2025, equivalent to N16.9tn, as increased recurrent expenditure offset revenue growth.

Total government spending rose to about N29.7tn, driven by higher personnel costs, rising debt servicing, and large off-budget deductions for special interventions, including N1.1tn for military-related spending and N900bn for the Renewed Hope development programme.

Capital expenditure declined from N5.5tn in 2024 to N4.5tn in 2025, with only 24 per cent of the approved capital budget implemented, limiting the impact of public investment on economic growth.

The World Bank also highlighted structural weaknesses in Nigeria’s budgeting process, including delayed budget approvals and lack of transparency in fiscal operations.

“The absence of a comprehensive organic budget law has weakened the formulation process, leading to delays, unrealistic projections, and reduced predictability for programme execution,” it stated.

Commenting, the Chief Executive Officer of CSA Advisory and a development economist, Aliyu Ilias, aligned with the World Bank’s recommendations and raised concerns over Nigeria’s current revenue management framework, warning that the structure of first-line deductions to MDAs is undermining fiscal discipline and weakening budget transparency.

Speaking in a telephone interview on the growing debate around deductions from the Federation Account, Ilias said the practice of allowing MDAs to access revenue directly at source creates room for unaccounted spending and distorts the national budgeting process.

He argued that the system has created a parallel spending structure outside formal budget approval, where some government projects are executed without legislative capture or proper fiscal oversight.

He said, “If you look at it generally, I think it’s a core angle to the way we do our revenue and the way it is managed. So, I think it’s wrong for MDAs to get revenue from the source, and I can also tell that a lot of projects are being done that are not captured in the budget. So that is the fundamental and fiscal problem. I think it is a good one that this issue is now looked into by the World Bank, and if you look at it, 41 per cent is too high as a deduction from the source.”

Ilias described the situation as a structural weakness in Nigeria’s public finance management, stressing that the increasing scale of deductions, estimated at about 41 per cent of total revenues, poses serious concerns for fiscal sustainability.

According to him, while the current revenue structure may provide some administrative convenience for agencies, it significantly reduces the pool of funds available for distribution and development spending across all tiers of government.

He, however, expressed scepticism about the likelihood of full implementation of proposed reforms aimed at restructuring the deduction system, noting that entrenched institutional interests may resist change.

“We can get fiscal discipline and get things right, but I doubt if the federal government would want to implement this policy because the government carries out some activities even before they consider others. They see it as their own priority and their decision,” he noted.

The economist added that Nigeria must return to a more structured fiscal framework anchored on clear revenue rules, budget discipline, and transparent allocation processes in line with established fiscal policy guidelines.

“For me generally, I think we have to follow our fiscal policy that has to do with revenue and revenue sharing,” he said.

Ilias further noted that state governors are also increasingly aware of the implications of rising deductions, arguing that the current system may inadvertently strengthen demands from subnational governments for greater fiscal allocation.

“I am sure governors are also exposed to this, and they would want to ask for more things for themselves because they keep an eye on them,” he said. “It would also give them the opportunity to request more, and they would have more disposable money to actually spend.”

He warned that without reforms, Nigeria risks deepening fiscal fragmentation, where competing interests among tiers of government continue to strain the Federation Account and weaken national development planning.

Meanwhile, the Bank has called for a major overhaul of Nigeria’s revenue retention framework, warning that the continued use of fixed percentage deductions for MDAs is undermining fiscal efficiency and shrinking funds available for national development.

The recommendation formed part of a broader policy assessment which argued that sustaining recent gains in revenue performance will require rationalising cost-of-collection arrangements and shifting all MDA financing to transparent budgetary appropriations.

According to the analysis, several federal agencies are still funded directly from gross revenue collections through statutory deductions, rather than through the annual budget process.

These include allocations such as 4 per cent of non-oil revenues and royalties to the Federal Inland Revenue Service, seven per cent of customs collections to the Nigeria Customs Service, 0.5 per cent of non-oil revenues to the Revenue Mobilisation, Allocation and Fiscal Commission, and three per cent of Value Added Tax to the North East Development Commission.

The report noted that such arrangements, while designed to ensure predictable funding for key institutions, now pose significant challenges to fiscal discipline.

It said, “Further consolidation of recent gains will require rationalising remaining cost-of-collection arrangements and transitioning MDA financing to transparent budget appropriations. Several MDAs continue to be financed through fixed percentages of gross revenues, such as four per cent to NRS from non-oil revenues and royalties, seven per cent to NCS from customs revenues, 0.5 per cent to RAMFAC from non-oil revenues, and three per cent to NEDC from VAT, rates that are high compared to other peer countries. These ad valorem arrangements create pro-cyclical funding dynamics and directly reduce the net revenues available for development spending.”

It argued that fixed percentage deductions directly reduce the net revenues available for distribution to the federal, state, and local governments, thereby limiting resources for infrastructure, health, education, and other development priorities.

To address these challenges, the analysis recommended a gradual transition to a system where all revenue agencies and regulatory bodies are funded through explicit budget appropriations, subject to annual legislative approval.

Under this model, funding would be debated, approved, and monitored through the normal budget cycle, rather than automatically deducted at source.

The policy paper further recommended a gradual reduction in cost-of-collection rates, particularly where existing mandates have either expired or become redundant.

It argued that phasing out such deductions would immediately increase net inflows into FAAC, boosting distributable revenues across all tiers of government.

“Transitioning to a model in which revenue agencies and regulatory bodies are funded through explicit budget appropriations, subject to annual legislative approval, performance oversight, and audit, would strengthen fiscal discipline and accountability. Gradually lowering excessive cost-of-collection rates and phasing out earmarked deductions where mandates have lapsed would increase net FAAC distributions to the federation. Complementary measures, including the publication of audited financial statements and strengthened independent oversight, would further reinforce transparency and confidence in the revenue-sharing system,” it added.

The report also called for stronger transparency measures, including the publication of audited financial statements by revenue-collecting agencies and enhanced independent oversight of deduction frameworks.

The reforms, if implemented, could significantly improve fiscal efficiency and increase the funds available for infrastructure and social investment at all levels of government. (PUNCH)

Update news