Nigeria’s federation revenue surged to N84 trillion over the last three years, yet a staggering 41% of these earnings never reached the Federation Account for distribution, according to new data from the World Bank’s Nigeria Development Update.
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The report revealed that pre-distribution deductions have significantly thinned the purse shared among federal, state, and local governments. While gross revenues climbed from N17.08 trillion in 2023 to an estimated N37.44 trillion by 2025, the amount siphoned for “first-line” deductions followed an even steeper trajectory jumping from N6.22 trillion in 2023 to nearly N15 trillion in 2025, effectively removing N34.53 trillion from the reach of the three tiers of government before they could even sit at the table.
The World Bank noted that this fiscal trend is creating a paradoxical situation where the country is earning more but has less to spend on actual development.
According to the Bank, while economic reforms such as the removal of the petrol subsidy and foreign exchange adjustments boosted nominal revenue, the current system automatically diverts these gains to various agencies.
By 2025, the scale of these deductions became so massive that several individual government agencies received more funding than the total revenue of many Nigerian states. The World Bank further observed that these transfers often exceeded the entire budget allocations for major social and growth-oriented federal ministries, leaving infrastructure and essential services underfunded.
The World Bank identified the lion’s share of these deductions as being driven by cost-of-collection charges and statutory transfers to agencies such as the Nigeria Customs Service, the Nigerian National Petroleum Company Limited (NNPC), and the Federal Inland Revenue Service.
Because these agencies are funded through fixed percentages of gross revenue, every increase in national earnings triggers a proportional windfall for them, regardless of their actual budgetary needs. The World Bank criticized this “pro-cyclical” funding model for being high compared to peer countries and for operating as a parallel spending structure that bypasses traditional legislative oversight and budget discipline.
The impact on the ground is visible in declining capital expenditure, which dropped from N5.5 trillion in 2024 to N4.5 trillion in 2025, with only a quarter of the approved budget actually implemented, according to the data. Meanwhile, the federal fiscal deficit remains high at N16.9 trillion due to rising debt servicing costs and recurrent spending.
Development economist Aliyu Ilias warned that the practice of allowing agencies to access revenue directly at the source creates room for unaccounted spending.
He argued that the current framework undermines fiscal transparency and suggested that 41% is far too high a price to pay for revenue collection, calling for a return to a more structured fiscal policy.
Ilias further stated that the structural practice of front-loading Federation Account (FAAC) deductions for agency “costs of collection” has evolved from a fiscal administrative tool into a systemic leak that fundamentally undermines Nigeria’s social contract. He noted that by allowing agencies to bypass the standard legislative budget cycle through automatic, fixed-percentage subtractions, the government has inadvertently created an autonomous spending tier that thrives even as the broader populace faces austerity and record-high public debt of $110.3 billion.
According to the economist, this off-budget reality not only skews the distribution of wealth—exemplified by single agencies out-earning entire state governments—but also erodes fiscal transparency, making recent revenue windfalls from subsidy and forex reforms appear as a benefit to the bureaucracy rather than the citizenry.
To fix the shrinking fiscal space, the World Bank is advocating for a complete overhaul of the revenue retention framework. The global lender recommends transitioning all agency funding to transparent budget appropriations that must be debated and approved by the legislature annually.
By phasing out fixed-percentage deductions and lowering cost-of-collection rates, the World Bank stated, the government could immediately boost the net funds available in the Federation Account.
Without such reforms, the World Bank warned, Nigeria risks a deepening fiscal crisis where institutional interests continue to outweigh national development priorities.
Ilias added that true reform would require a political pivot away from these entrenched ad valorem arrangements toward a performance-based, legislative appropriation model that prioritizes national development over institutional overhead.
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