Fitch Affirms Lagos State at ‘B’ with Stable Outlook
- Lagos does not depend on oil money
- IGR Accounts for 68% of Revenue
- Statutory Allocation Accounts for 10% of State Income
- VAT Allocation to Lagos Increased to 55%
- Lagos has material exposure to FX risk
- Capital expenditure accounts for 55% of Expenditure in 2025
- External debt to development lenders accounted for 62% of Lagos’s direct debt
- Lagos needs N10trn for capex spending
Fitch Ratings has affirmed Lagos State’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at ‘B’ with stable outlooks.
According to Fitch, the affirmation reflects Lagos’s unchanged Standalone Credit Profile (SCP) of ‘b+’, which remains capped by Nigeria’s sovereign ratings.
Fitch expects rising but sustainable adjusted debt over the scenario horizon, which will be serviced from Lagos’s rising internally generated revenue (IGR) and higher VAT allocation following the implementation of Nigeria’s fiscal reform.
Fitch assesses Lagos’s SCP at ‘b+’, reflecting a combination of a ‘Vulnerable’ risk profile and an ‘aa’ financial profile. The SCP also includes comparisons with other Nigerian states and international peers, particularly South American local and regional governments.
The credit profile reflects Lagos’s operating performance supported by an outstanding level of IGR in the national context. Fitch said Lagos benefits from a broad tax base and diversified economy, which contribute to a stable revenue structure.
This is led by IGR, which accounted for 68% of its NGN2.6 trillion operating revenue in 2025, and is driven by moderately cyclical taxes such as pay-as-you-earn (PAYE).
The stability of tax revenue is counterbalanced by some volatility in other operating revenue sources such as sales proceeds, rents, land-use charges, fees and fines.
Fitch said it does not view Lagos as reliant on oil-related government transfers, as statutory allocations (excluding VAT) averaged 10% of Lagos’s operating revenue over 2020-2025, shielding Lagos from the high volatility of oil prices and FX rates.
The fiscal reform, phased in from 2026, raises the VAT allocation to states to 55% from 50% and adjusts the sharing formula among states, with greater emphasis on local consumption, which drives Fitch’s estimate of a 40% increase in VAT allocated to Lagos in 2026 compared with 2025.
Fitch believes that Lagos has low revenue adjustability as it has no tax-setting power on PAYE or VAT. Analysts estimate that an additional revenue increase (primarily through charges and fees) would cover less than 50% of a reasonably expected revenue decline.
Lagos’s fiscal flexibility relies on a wide but underutilised PAYE tax base (39% of operating revenue in 2025). Revenue adjustability is also limited by low affordability of additional taxation in an international context.
Fitch believes that Lagos is more likely to absorb potential revenue shocks by reducing its operating margin to 35%-40% from an average of 54% over the past five years.
Fitch said Lagos is exposed to a deteriorating operating environment, with weakening control over expenditure growth, driven by high inflation, rising commodity prices, and supply constraints amid some naira volatility.
The state has a wide set of responsibilities and a high need for capex to maintain its attractiveness as Nigeria’s main economic hub, with demographic pressures to provide more infrastructure, health and education services, limiting the scope for cutbacks.
“We expect the country’s inflation to be in the double digits in the coming years, which will affect operating expenses growth”.
The central government does not have mandatory balanced-budget rules defined for Nigerian states, which are required to maintain their deficits at 3% of national GDP. Capex made up 55% of Lagos’s expenditure before debt service in 2025, keeping the share of inflexible costs well below 90%.
“We believe expenditure cuts would be moderately affordable, due to better infrastructure and existing services compared with national peers”.
However, Fitch expects Lagos to maintain high capex to retain its attractiveness for companies and residents and to cope with its fast-growing population.
It noted that Nigeria’s framework for local and regional government debt is evolving, so borrowing limits are quite wide. Nigerian states have no restrictions on debt maturities, interest rates or currency exposure.
To ensure timely debt service, its internal debt is assisted by a state-level irrevocable standing payment order while external debt is serviced by deductions from the statutory allocation, Fitch said.
Analysts noted that Lagos has material exposure to FX risk. External debt to development lenders accounted for 62% of Lagos’s direct debt at the end of 2025, due to rapid naira depreciation since June 2023.
Lagos relies on various funding sources and maintains continuous market access through regular bond issuances, which represent about 20% of its direct debt at end-2025.
The rating agency acknowledged that Lagos has good access to local financial markets with recurrent bond issuance and can access liquidity lines and short-term credit from domestic banks rated in the ‘B’ category, driving our ‘Weaker’ assessment of this factor.
Lagos held a comfortable NGN576 billion in cash at the end of 2025, including a NGN35 billion sinking fund to support its bond debt service. Fitch deems year-end cash as partly earmarked to offset net payables.
Lagos’s fiscal performance remained strong in 2025, Fitch said. It added that the state’s operating revenues were dynamic (up 23% after a 2024 increase of 73%), driven by both IGR and transfers from the central government (including VAT), in a context of high but decreasing inflation and a stabilisation of the naira.
Operating expenses of the state grew at 34%, driven by 43% increase in overheads and an additional 21% increase in staff costs, the rating note highlighted.
Fitch estimates Lagos’s capex needs for the next five years at above NGN10 trillion, largely sustained by the state’s own resources and new borrowing.
The rating noted that Lagos’s ambitious capex plan for economic and social development aims to ensure growth. It includes several infrastructure projects (mostly schools, transport and health facilities) and seeks to boost the state’s technology capacity and food security. Airtel Africa Makes History, Market Value Tops N21trn
