Nigeria’s improving revenue performance is coming under renewed scrutiny after the World Bank warned that a significant portion of federation income is being absorbed by deductions before reaching federal, state, and local governments, raising concerns about fiscal sustainability.
According to the Bank, more than 39 percent of total revenues generated in 2025—amounting to about N14.94 trillion—was consumed by statutory and operational deductions prior to distribution by the Federation Account Allocation Committee (FAAC). This trend has reduced the funds available for public services at a time of rising borrowing costs and mounting fiscal pressures.
Presenting the April 2026 edition of the Nigeria Development Update in Abuja, the World Bank’s Lead Economist, Fiseha Gebregziabher, noted that although gross federation revenues increased significantly, deductions by various institutions also rose sharply during the same period.
He explained that first-line deductions to federal Ministries, Departments, and Agencies (MDAs) have expanded considerably, thereby shrinking net distributable revenues and altering the fiscal balance across the three tiers of government.
The report highlighted that deductions to key MDAs—including the Nigerian Revenue Service (NRS), Nigeria Customs Service (NCS), and the Nigerian Upstream Petroleum Regulatory Commission—more than doubled from about N1.9 trillion in 2023 to over N4.2 trillion in 2025, representing roughly 1 percent of GDP.
Gebregziabher attributed much of the increase to higher nominal revenues following the removal of foreign exchange and petrol subsidies. However, he noted that because many deductions are structured as fixed percentages of gross revenue, any increase in collections automatically leads to proportionally larger transfers to these agencies.
He added that in 2025, FAAC transfers to some MDAs exceeded the total revenues of several Nigerian states, with some individual agencies receiving more than the average state’s income. He further observed that these deductions also surpassed budget allocations to major federal ministries focused on social services and economic growth.
The report warned that such pre-distribution deductions effectively pre-commit a large share of federation resources, limiting transparency and reducing the fiscal space available for development spending.
The World Bank, however, acknowledged recent reforms introduced by the Federal Government, particularly Executive Order 9 signed by President Bola Tinubu in February 2026. The directive suspends selected oil-sector deductions and mandates direct cash remittances to the Federation Account.
The suspended deductions include the 30 percent Frontier Exploration Fund charge from production sharing contracts (estimated at N453.5 billion in 2025), the 30 percent management fee on profit oil and gas previously paid to the Nigerian National Petroleum Company Limited (NNPCL), and the transfer of gas flare penalties to the Midstream and Downstream Gas Infrastructure Fund, estimated at N591.8 billion.
The Bank noted that streamlining these deductions could boost federation revenues by about 0.4 percent of GDP, while improving transparency in oil revenue management.
It further recommended broader reforms, including rationalising cost-of-collection arrangements and transitioning the funding of MDAs from fixed revenue percentages to transparent budget appropriations subject to legislative oversight and audit.
According to the report, several agencies still receive statutory shares of gross revenues—such as 4 percent to the NRS, 7 percent to the NCS, 0.5 percent to RAMFAC, and 3 percent to the North East Development Commission (NEDC)—rates considered high compared to international peers. These arrangements, it said, create pro-cyclical funding patterns and reduce funds available for national development.
The Bank advised that gradually lowering these rates and phasing out outdated earmarked deductions would increase net FAAC distributions and strengthen fiscal discipline. It also called for improved transparency through the publication of audited financial statements and enhanced independent oversight.
Commenting on the issue, the Minister of Finance and Coordinating Minister of the Economy, Wale Edun, said the ongoing reforms are aimed at ensuring that revenues meant for the Federation Account are fully remitted without unnecessary deductions.
He disclosed that a committee he chairs is already implementing measures to redirect previously deducted funds—such as the NNPCL management fee, frontier exploration funds, and gas flare penalties—directly into the Federation Account.
Edun added that the committee would soon issue clearer guidelines to guarantee seamless remittance of revenues and eliminate extraneous deductions, particularly at a time when government earnings are improving.
He emphasised that the reforms are not intended to undermine the operational efficiency of revenue-generating agencies but to ensure that excess funds rightly accrue to the government.
The World Bank concluded that while Nigeria has made progress in boosting revenues, addressing the growing scale of pre-distribution deductions remains critical to enhancing fiscal transparency, improving resource allocation, and supporting sustainable economic growth.
