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DEBT SUSTAINABILITY AND CAPITAL EXPENDITURE EXECUTION AT THE SUBNATIONAL LEVEL IN ONDO STATE.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study.
This issue of fiscal sustainability, and effective use of the public borrowing, has taken a certain immediacy in the sub-national fiscal environment of Nigeria over the past few years due to an aggregate of macroeconomic shocks, structural susceptibility of revenues and an acceleration of debt commitments that have tangibly impaired the capacity of state governments to implement their capital budgets. In 2023, the overall stock of public debt in Nigeria increased by 1,000 per cent (up by more than 120 per cent in three years) to N121.67 trillion (or about USD 108 billion) from a level of about N12.6 trillion in 2015 and N97.34 trillion at the end of 2023 Through this trend, there has been an increasing debt service-to-revenue ratio on the federal level estimated to be around 77 per cent of total government revenue in 2024 an indicator that reflects acute fiscal stress and the crowding out of productive capital expenditures by debt service obligations (Veriva Africa, 2024; Sciencepubco, 2025).
The fiscal landscape is equally a complicated landscape at the sub-national level. The State of States report by BudgIT (2025) shows that total subnational debt had slightly increased by 6.8 per cent in 2024 to N10.57 trillion compared to the 36.4 per cent growth between 2022 and 2023 indicating that some states are starting to take a more restrained approach in fiscal management. Nonetheless, this total number conceals notable heterogeneity; the five most indebted states accounted to N5.32 trillion, which is more than what the 25 other states owed. Worse still, in 2023, 32 states have at least 55 per cent of their revenues based on Federation Account Allocation Committee (FAAC) transfers, which demonstrate a strongly structural reliance on the oil-based federal allocations that provides a high susceptibility to the oil-based commodity prices to sub-national fiscal position (BudgIT, 2025).
The case of Ondo State, with its ample reserves of oil and gas that have traditionally made up the staple of its fiscal revenues, and being situated in the south-western part of the geopolitical zone of the country is especially instructive to study the issue of debt sustainability and capital expenditure implementation at the sub-national level. During the year, the N395.257 billion state budget has been adjusted upwards by 24.49 per cent to N492.045 billion to meet commitments to development of infrastructure, and capital expenditure was estimated at N222.259 billion and recurrent expenditure at N172.997 billion (Ondo State Government, 2024). The 2025 budget of N698.659 billion assigned N433.622 billion, or 62.06 per cent, to capital expenditure, which shows that the administration is keen on emphasizing spending on development (Ondo State Government, 2025). But then again, the crucial empirical challenge of whether the allocations of appropriated capital expenditure are indeed timely and effective implemented and whether the capital expenditure being debt-financed indeed create the same improvement in the state infrastructure and economic performances has not been well addressed in the sub-national fiscal literature.
The nature of relationship between capital expenditure and public debt dynamic is complex in nature. Although the conventional rationale is that sovereign borrowing is a tool to finance productive investments in capital formation whose returns will grow over time than the cost of debt service to enhance inter-temporal fiscal balance, the experience of Nigerian federal and sub-national governments indicates a methodical deviation between the purpose of sovereign borrowing explanations and the ultimate expenditure plans (Omodero, 2020; Sciencepubco, 20 As it has been shown, there is a high percentage of a large amount of borrowed funds being used on recurrent spending such as staff expenses and overheads as opposed to productive capital projects which debt was supposedly incurred. The federal government in 2024 had a total debt service allocation of N8.25 trillion (explicit crowding-out effect) compared to its capital expenditure budget of N7.81 trillion, which puts sub-national governments in no different position than mimicking it (Sciencepubco, 2025; BudgIT, 2025).
The fiscal environment of Ondo State is further influenced by its position as an oil producing state which is subject to derivation fund of 13 per cent of the federal oil revenues which in addition to giving ideal fiscal premium on top of the normal FAAC allocation creates commodity price volatility in the revenue base of Ondo State. This study aims to systematically analyze the nature of the existing factor of the gap between capital budgets and actual capital disbursements, which has always been the case with Nigerian sub-national budgetary execution, based on the reports provided by the state Auditor-General, as well as Medium-Term Expenditure Frameworks (Ondo State Government, 2022-2024 MTEF; Ondo State Annual
1.2 Statement of the Problem
A fundamental tension exists in Ondo State’s fiscal management between the imperative to service existing debt obligations and the need to execute capital expenditure programmes that drive infrastructure development, economic diversification, and human capital formation. This tension is not unique to Ondo State; it reflects a systemic pathology in Nigerian sub-national fiscal management characterised by high debt service burdens, low revenue mobilisation relative to fiscal commitments, and persistent under-execution of capital budgets that leaves appropriated development resources unspent or substantially diluted in real terms (BudgIT, 2025; Aksu Journal of Administration and Corporate Governance, 2024).
The empirical literature on Nigerian public finance has documented several dimensions of this problem. Studies such as Akamobi et al. (2024) and Omodero (2020) have established that high debt servicing costs negatively impact capital investment outcomes at the federal level, while Aluthge, Jibir, and Abdu (2021) and Chandana et al. (2024) have found that capital expenditure, when effectively executed, exerts a positive and significant impact on GDP. However, the sub-national dimension of this nexus particularly the relationship between debt sustainability indicators, capital expenditure execution rates, and developmental outcomes in states such as Ondo remains inadequately theorised and empirically underdeveloped. Nigeria’s Debt Management Office has repeatedly emphasised the need to extend robust fiscal sustainability analysis to the subnational level, noting that inadequate information on sub-national public finances constitutes a significant gap in Nigeria’s fiscal governance architecture (IMF, 2015; DMO, 2024).
For Ondo State specifically, the transition in governance in December 2023 following the demise of Governor Rotimi Akeredolu and the assumption of executive responsibilities by Governor Lucky Aiyedatiwa introduced a period of fiscal recalibration whose implications for debt management and capital budget execution warrant rigorous analytical attention. The 2024 financial statements reveal a state actively seeking to balance infrastructure commitments against revenue constraints, with a revised budget 24.49 per cent above original estimates and a State Tax Revenue share of only 8 per cent of total revenues declining from 13 per cent in 2023 highlighting the urgency of fiscal sustainability concerns (Ondo State Auditor-General, 2024).
1.3 Objectives of the Study
The broad objective of this study is to examine the relationship between debt sustainability and capital expenditure execution in Ondo State, Nigeria. The specific objectives are:
- To assess the debt sustainability profile of Ondo State using key fiscal sustainability indicators including debt-to-revenue ratio, debt service-to-revenue ratio, and debt-to-IGR ratio;
- To evaluate the pattern and determinants of capital expenditure execution rates in Ondo State over the period 2015 to 2024;
iii. To examine the relationship between debt service obligations and capital expenditure execution in Ondo State, with a focus on the crowding-out hypothesis;
- To assess the quality of capital expenditure execution in Ondo State including project selection, procurement efficiency, and development outcomes in relation to borrowed funds; and
- To provide evidence-based policy recommendations for strengthening debt sustainability and improving capital expenditure execution in Ondo State.
1.4 Research Questions
- What is the current debt sustainability profile of Ondo State, and how has it evolved over the period 2015 to 2024?
- What is the pattern of capital expenditure execution rates in Ondo State, and what fiscal and institutional factors determine the extent of budget execution?
iii. Is there a statistically significant crowding-out relationship between debt service obligations and capital expenditure execution in Ondo State?
- What is the quality of capital expenditure execution in Ondo State, and what proportion of borrowed funds is channelled to productive capital projects relative to recurrent uses?
1.5 Research Hypotheses
H01: Debt sustainability pressures (as proxied by debt service-to-revenue ratio) have no significant negative effect on capital expenditure execution rates in Ondo State.
H02: There is no significant relationship between FAAC revenue volatility and capital expenditure execution in Ondo State.
H03: Internally generated revenue growth has no significant positive effect on capital expenditure execution rates in Ondo State.
1.6 Significance of the Study.
The research has a lot of theoretical, empirical, as well as policy implications. Theoretically, it adds to the sub-national public finance literature in Nigeria by using the historical structures of debt sustainability to understand the sub-national fiscal environment, thus expanding the confines of the discipline to a destination of government, which implements much of the developmental spending in Nigeria but is hitherto relatively poorly analysed. The study produces empirically original longitudinal fiscal data on the performance of Ondo States budget execution and data on debt performance over ten years to create a total evidence base regarding fiscal governance at the state level. Policy-wise, the findings of the study would be directly applicable to the Ondo State Government, the Debt Management Office, the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC), the Federal Ministry of Finance and development partners such as the World Bank and the International Monetary Fund, who have been concerned about the sustainability of the sub-national fiscal paths in Nigeria. Another contribution of the study to the evidence base of current debate on fiscal federalism reforms in Nigeria is with regard to sub-national borrowing arrangements, monitoring of capital expenditure and management of derivation funds.
1.7 Scope of the Study.
The paper discusses the fiscal operations of the Ondo State between the year 2015 and 2024, which include four budget cycles and a gubernatorial administration. The main sources of data will be the Ondo State Annual Financial Statements, approved and revised budgets issued by Ondo State Budget Office, DMO subnational debt data, NBS fiscal data, BudgIT State of States reports, and key informant interviews conducted with the officials of the Ondo State Ministry of Finance, Budget Office, Debt Management Office, and Accountant-General Office. The analytic approach of the study is reflectively on capital expenditure component of the Ondo State budget; specifically on the infrastructure, education, health and agricultural sectors of the budget where the capital budget implementation lapse have critical results on developmental significant outputs.
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Aluthge, C., Jibir, A., & Abdu, M. (2021). Impact of government expenditure on economic growth in Nigeria, 1970–2019. CBN Journal of Applied Statistics, 12(1), 139–174.
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