How Nigeria’s reform dividend risks being squandered

Nigeria’s removal of fuel subsidies and its shift toward a more market-reflective foreign exchange regime in 2023 did more than alter prices. They quietly restructured the country’s political economy. The most consequential outcome of these reforms is no longer unfolding in Abuja’s macroeconomic pronouncements but in state capitals, where unprecedented fiscal resources are now being allocated with limited public scrutiny.

Interestingly, the immediate effects of reform, higher fuel prices and a weaker naira, were visible and painful. Less visible, but far more durable, has been the fiscal reordering that followed. With fewer deductions from federally collected revenues, more money is now flowing into the Federation Account and, by extension, into state treasuries. According to the Nigeria Extractive Industries Transparency Initiative (NEITI), total FAAC disbursements to all tiers of government reached ₦15.26 trillion in 2024, representing a 43 percent increase over 2023. State governments were the principal beneficiaries.

This shift matters because it marks a decisive transfer of spending power. FAAC allocations to states rose from approximately ₦3.58 trillion in 2023 to ₦5.81 trillion in 2024, an increase of about 62 percent. In practical terms, Nigeria’s reform dividend is now being spent first at the subnational level. That single statistic captures the new reform reality: governors now exercise more fiscal discretion, in nominal terms, than at any point since the early 2000s.

This is not an abstract change. It is reflected in ballooning state budgets. Lagos State’s proposed ₦4.237 trillion budget for 2026 and Enugu State’s projected ₦1.62 trillion envelope illustrate how dramatically subnational spending capacity has expanded in naira terms. While exchange-rate adjustments complicate historical comparisons, the direction of travel is unmistakable. States are no longer fiscally marginal actors in Nigeria’s political economy.

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Meanwhile, the critical question is not whether states have more money. It is about whether increased allocations are translating into better outcomes.

So far, the evidence is mixed at best. Infrastructure gaps remain stubborn. Health and education outcomes show limited improvement. BudgIT’s analysis of subnational finances highlights persistent transparency weaknesses, noting that 28 states still rely on FAAC for at least 55 percent of total revenue in 2024. Heavy dependence on federal transfers weakens incentives for internal revenue mobilisation and blunts fiscal discipline, even when inflows rise.

To be clear, larger budgets do not automatically yield better services. Several causal mechanisms intervene. Inflation has sharply raised project costs, eroding the real value of capital spending. Procurement systems in many states remain opaque, delaying execution and inflating costs. Planning capacity is uneven, with some states expanding envelopes faster than they can credibly design or deliver projects. In others, recurrent expenditure continues to crowd out long-term investment.

There is also variation that deserves recognition. Not all states perform equally, and governance outcomes differ widely. Treating subnational governments as a monolith obscures this reality. However, variation strengthens rather than weakens the central argument: outcomes now depend primarily on state-level choices, administrative competence, and political incentives, not on federal price controls.

International experience reinforces this point. Countries such as Indonesia and Vietnam converted decentralised fiscal power into development gains only after strengthening subnational accountability systems, procurement rules, and performance monitoring. Reform succeeded not because money flowed, but because institutions disciplined how it was spent. Nigeria’s current moment lacks that institutional complement.

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Defenders of the status quo may argue that it is too early to judge outcomes. Capital projects take time, and reform shocks take years to settle. That caution has merit. But it does not justify opacity. If reform is to retain political legitimacy, citizens must be able to trace higher personal costs, fuel, transport, and food to credible improvements in public goods. Absent that link, reform fatigue becomes inevitable.

The post-subsidy era has redefined Nigeria’s reform debate. It is no longer primarily about controlling prices or managing exchange rates. It is about spending, quality, fiscal discipline, and state-level accountability. The federal government has shifted the burden, and the opportunity, downward. What has not yet shifted is oversight.

Without stronger disclosure standards, legislative scrutiny, and citizen monitoring at the state level, Nigeria risks substituting one distortion for another: replacing subsidy leakage with subnational inefficiency. Reform has expanded fiscal space. Whether it improves living standards will depend on whether accountability mechanisms evolve fast enough to govern that space.

The reform dividend has arrived. The test now is whether Nigeria’s states can prove they deserve it.