World Bank Raises Alarm Over ‘Hidden’ Spending System Draining Nigeria’s Revenue

The World Bank has flagged what it describes as a “hidden” public finance system in Nigeria that diverts a significant share of national earnings before they are shared among the three tiers of government.

According to the Bank’s latest Nigeria Development Update, the country generated about N84 trillion in federation revenue over the past three years, but roughly 41 per cent of that amount estimated at N34.53 trillion was deducted at source before reaching the Federation Account.

The report shows that while gross revenue rose sharply from N17.08 trillion in 2023 to a projected N37.44 trillion by 2025, so-called “first-line” deductions also surged, climbing from N6.22 trillion to nearly N15 trillion within the same period.

This trend, the Bank noted, has created a paradox in which Nigeria is earning more revenue but has less available for public spending on infrastructure and essential services.

Revenue Gains Eroded by Automatic Deductions

The increase in revenue has been driven largely by recent economic reforms, including the removal of petrol subsidies and foreign exchange adjustments. However, the benefits of these gains are being significantly eroded by automatic deductions allocated to government agencies.

Key beneficiaries of these deductions include the Nigeria Customs Service, the Nigerian National Petroleum Company Limited, and the Federal Inland Revenue Service.

These agencies operate under a funding model that allows them to retain fixed percentages of gross revenue as “cost of collection.” As a result, any increase in national earnings automatically translates into higher allocations to these bodies, regardless of their actual budgetary needs.

The World Bank described this system as “pro-cyclical,” noting that it effectively functions as a parallel spending structure that bypasses the conventional budgetary process and legislative oversight.

By 2025, the scale of these deductions had become so large that some individual agencies were receiving more funds than the total revenues of several Nigerian states. In some cases, their allocations also exceeded the budgets of key federal ministries responsible for social services and economic development.

Impact on Development Spending

The consequences of this system are already visible in Nigeria’s fiscal performance. Capital expenditure dropped from N5.5 trillion in 2024 to N4.5 trillion in 2025, with only about 25 per cent of the approved capital budget implemented.

At the same time, the federal government’s fiscal deficit remains elevated at N16.9 trillion, driven by rising debt servicing obligations and persistent recurrent spending.

Analysts warn that the structure of automatic deductions is shrinking the fiscal space available for development, even as revenues increase.

Development economist Aliyu Ilias criticised the practice, arguing that allowing agencies to access funds directly at source creates room for unaccounted spending and weakens transparency.

He described the 41 per cent deduction rate as excessively high and called for a return to a more structured and accountable fiscal framework.

Calls for Urgent Reform

To address the issue, the World Bank is recommending a comprehensive overhaul of Nigeria’s revenue management system.

Central to its proposal is the elimination of fixed-percentage deductions and the transition to a system where all agency funding is subject to annual legislative appropriation and scrutiny.

The Bank also called for a reduction in cost-of-collection charges, noting that Nigeria’s rates are significantly higher than those in comparable countries.

Such reforms, it said, would immediately increase the volume of funds available in the Federation Account for distribution to federal, state, and local governments.

A Growing Fiscal Risk

The report warns that without urgent reforms, Nigeria risks deepening its fiscal challenges, as institutional spending continues to take precedence over national development priorities.

It further highlights that the current system has evolved into an “off-budget” structure that undermines transparency and accountability, allowing agencies to operate with considerable financial autonomy.

With public debt already estimated at over $110 billion and economic pressures mounting, experts say reining in these automatic deductions is critical to restoring fiscal discipline and ensuring that revenue gains translate into tangible improvements for citizens.