In the grand theatre of Nigerian federalism, few performances are as revealing as the quarterly distribution of value-added tax revenues. The latest figures from Q1 2025 tell a story that should trouble any economist concerned with incentives, efficiency, and long-term sustainability: Nigeria has created a fiscal system that systematically penalises its most productive regions while rewarding economic stagnation.
The numbers are stark. Lagos State alone generated ₦819.62 billion in VAT—nearly half of the national total and more than the combined contribution of 30 other states. Yet under the Federation Account Allocation Committee’s redistribution formula, Lagos and its South-West neighbours contributed ₦929.87 billion but received back merely ₦258.19 billion. That represents a staggering 72.2 percent deficit, effectively making Lagos the unwilling financier of Nigeria’s fiscal federalism experiment.
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The geometry of imbalance
The mathematical elegance of Nigeria’s economic disparities becomes most apparent when viewed through the lens of zonal redistribution. The North-East, contributing a modest ₦30.04 billion to the VAT pool, received ₦124.20 billion in return—a windfall of over 313 percent. The South-East performed similarly, turning its ₦28.37 billion contribution into a ₦104.50 billion allocation, representing a 268 percent surplus.
Rivers State, Nigeria’s second-largest VAT contributor at ₦278.23 billion, anchors a South-South region that generated ₦364.99 billion but received only ₦171.19 billion—a 53 percent shortfall that underscores how oil-producing states subsidise the federation despite popular narratives suggesting otherwise.
At the bottom of the contribution ladder sit states like Taraba (₦2.33 billion), Imo (₦2.34 billion), and Cross River (₦2.65 billion)—each contributing less than one per cent to the national VAT pot while benefiting disproportionately from redistribution.
The dependency trap
This fiscal architecture has created what economists call a “moral hazard”—a system where poor performance is systematically rewarded while excellence is penalised. States receiving disproportionate VAT allocations have little incentive to develop their internal revenue generation capabilities or invest in economic diversification. Why modernise tax collection systems or create business-friendly environments when federal transfers reliably fill budget gaps?
The consequences extend beyond mere accounting. Lagos bears the infrastructure burden of hosting Nigeria’s largest concentration of formal and informal businesses yet watches its generated revenues redistributed to states that offer far less economic output. The city’s traffic-clogged roads, strained power grid, and overwhelmed public services reflect, in part, this fiscal drain.
Meanwhile, recipient states operate what amounts to a command economy by proxy—their budgets determined not by local economic performance but by Abuja’s allocation algorithms. This creates a dependency that stunts regional development and perpetuates the very inequalities the system was designed to address.
“More fundamentally, Nigeria cannot build a sustainable economy on the backs of a few productive states while others coast on federal allocations.”
Federal Character vs. Economic reality
Nigeria’s VAT sharing formula—50 percent based on derivation, 30 percent on population, and 20 percent on equality—was crafted with noble intentions. The principle of “Federal Character” seeks to ensure that Nigeria’s diversity translates into shared prosperity rather than winner-take-all economics. But good intentions have yielded perverse outcomes.
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The current system resembles a corporation where a handful of departments generate all revenue while others collect equal bonuses. Such arrangements might work temporarily, but they inevitably breed resentment, reduce productivity, and threaten organisational cohesion. In Nigeria’s case, they risk pushing high-performing states toward demands for greater fiscal autonomy.
Consider Oyo State’s surprising third-place VAT performance at ₦79.78 billion—outpacing oil-producing states like Delta (₦20.04 billion) and Akwa Ibom (₦16.08 billion). This achievement reflects deliberate policy choices: investment in agriculture, support for small businesses, and efforts to formalise the economy. Yet Oyo’s success generates no additional retention of its contributed revenues, removing incentives for other states to emulate its approach.
The path forward
Reform need not abandon redistribution entirely. Even the most market-orientated federations maintain some horizontal balancing mechanisms. But Nigeria’s system requires fundamental recalibration to align incentives with desired outcomes.
First, the VAT sharing formula should incorporate performance incentives. States that demonstrate measurable improvements in tax compliance, business registration, or economic diversification should retain larger shares of locally generated revenues. This would maintain redistribution while encouraging competitiveness.
Second, transparency mechanisms must accompany any redistribution. States receiving disproportionate VAT allocations should be required to publish detailed spending reports and demonstrate efficient utilisation of federal transfers. Perpetual dependency without accountability serves neither equity nor efficiency.
Third, technical assistance should accompany fiscal transfers. Rather than simply redistributing revenues, the federal government should invest in capacity building for low-performing states—helping them develop tax collection systems, business incubation programmes, and economic diversification strategies.
The reckoning ahead
Nigeria’s VAT landscape mirrors its broader economic challenges: a few productive centres carrying an increasingly heavy load while other regions remain trapped in cycles of dependency. This model worked when oil revenues could mask inefficiencies, but those days are fading.
The mathematics are unforgiving. Lagos cannot indefinitely finance Nigeria’s fiscal federalism while managing its own infrastructure deficits. Rivers cannot forever subsidise regions that show little inclination toward economic productivity. The South-West cannot perpetually accept 72 percent deficits in VAT redistribution without questioning the system’s fairness.
More fundamentally, Nigeria cannot build a sustainable economy on the backs of a few productive states while others coast on federal allocations. The country’s long-term viability depends on broadening the base of economic contributors, not deepening the dependence of economic passengers.
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A federation’s choice
The Q1 2025 VAT figures present Nigeria with a choice that extends far beyond fiscal policy. The country can continue its current path—allowing productive regions to subsidise stagnant ones while hoping that redistribution alone will generate national cohesion. Or it can embrace reforms that reward productivity, encourage competition, and build a truly federal system where each state has incentives to contribute to national prosperity.
The numbers have spoken clearly. Lagos generates nearly half of Nigeria’s VAT while receiving back less than a third of its contribution. The North-East contributes virtually nothing while receiving more than three times its fair share. This is not fiscal federalism—it is fiscal socialism, where success is taxed and failure is subsidised.
In any functioning federation, such imbalances would trigger immediate reforms. In Nigeria, they have become accepted features of a system that mistakes redistribution for justice and dependency for solidarity. The time for change is not just overdue—it is essential for the federation’s survival.
The alternative is a country living perpetually on borrowed efficiency, where its most productive regions wither under the weight of collective obligation while its weakest regions never develop the muscle memory of self-reliance. That is not a federation worth preserving—it is merely a collection of states held together by mutual economic dysfunction.
Nigeria deserves better. Its most productive states certainly do. And paradoxically, so do its weakest—for they will never realise their potential as long as dependency remains more profitable than development.
Dr. Oluyemi Adeosun, Chief Economist, BusinessDay Media
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