Extreme caution on states’ borrowing spree

Not less than 21 states have expressed their interest to borrow N1.65trillion from both domestic and external sources. This is despite the 40 per cent increase in revenues they receive from the Federation Account Allocation Committee (FAAC). The increase in states’ revenue is a windfall from the removal of petrol subsidy by President Bola Tinubu on May 29, last year. According to the Debt Management Office (DMO), the borrowing plan by the states will worsen the nation’s debt stock, which currently stands at N97.3 trillion.

Already, the indebtedness of the states is gradually spiraling out of control.  As of December 31, 2023, the total external debt stock of the 36 states and the Federal Capital Territory (FCT), stood at $4.61 billion as against $4.46billion in 2022, while the domestic debt for same period of 2023 was N5.82trillion. The governors should account for the loans already taken. Available records show that in the first six months in   office in 2023, 13 new state governors reportedly borrowed N226.8billion from domestic and external financial creditors. Extreme caution on borrowing is needed because of the inherent risks involved. As of December 2023, the highest indebted states included: Lagos, N929bn; Delta, N333.9bn; Rivers, N232.58billion; Ogun, N221bn; and Imo, N217bn. 

Undoubtedly, the economic implication is dire. The states will spend more revenues to service debts. Details of the borrowing plan by the 21 states which was made public recently, show that Imo State will borrow N271.3bn; Anambra, N245bn; Katsina , N163.8bn; Kaduna, N150bn; Oyo, N133bn; Enugu, N103bn; Gombe, N73.75bn;  Bayelsa, N64bn. Others are Bauchi, N59bn, Kebbi, N56.7bn; Edo, N42.7bn; Borno, N42.7bn,;  Benue, N34.69bn. The rest are Ekiti, N27.15bn; Kogi, N37bn; Nasarawa, N32.8bn; Kwara, N30.76bn; Osun, N12.36bn; and Jigawa, N12.36bn.

Last year, the states that borrowed from domestic markets were Benue, Cross River, Katsina, Niger, Plateau, Rivers, Zamfara and the Federal Capital Territory (FCT). Total debt within that period stood at N115.57bn. States that borrowed from external sources included Ebonyi, Kaduna, Kano, Niger, Plateau, Sokoto, Taraba and Zamfara. Their total borrowing from foreign creditors stood at $125 million or N111.24bn. A breakdown of the states’ indebtedness in 2023 showed that Cross River State took the highest loan of N16.2bn from domestic market and $57.95 million from foreign financial creditors between June and December, 2023. It was followed by Katsina and Niger states with N36bn and N17.85bn, respectively. Although there is nothing wrong with borrowing per se, we advise that the loans be judiciously used. 

It is obvious that many states cannot now pay workers’ wages or meet other financial obligations because of their rising indebtedness. Many states are on the brink of bankruptcy without the monthly funds from FAAC. Only six states can survive without funds from the Federation Account.  Between June 2023 and June 2024, data from FAAC showed that a total of N7.4 trillion was disbursed to the states and the 774 Local Governments. The states are projected to receive additional N5.54trillion between July and December, this year. 

This is against the N3.3trillion disbursed to the states in the same period, last year. This is beside revenue from Value Added Tax (VAT). Beyond that, oil-producing states receive 13 per cent from derivation fund. Yet, most of the states remain financially insolvent due to mismanagement of resources.  The borrowing spree does not augur well for the economies of the states. Recent report from the Nigeria Extractive Industries Transparency Initiative (NEITI) said that the borrowing pattern of most states exceeds the recommended 3 percent contained in the Fiscal Responsibility Act 2007.

The National Assembly should review the Fiscal Responsibility Act to enable close monitoring of loans taken by state governments. Binge borrowing will likely harm the economy.  For example, at the end of the second quarter (Q2) 2024, the nation’s debt was N97trillion.  It has been projected that Nigeria’s debt stock may exceed N100trillion by the end of 2024. This excludes the N20trillion Ways and Means advances obtained from the CBN by the Buhari administration. Let the governors borrow cautiously. As at weekend, the naira exchanged for N1,620/$1. This is despite measures taken so far by the Central Bank of Nigeria (CBN) to shore up its value.    The foreign exchange market is still volatile. State governments should avoid excessive borrowing. They can even govern well without borrowing. Let them prudently manage the resources of their states. We enjoin them to creatively diversify their economies and increase their Internally Generated Revenues (IGRs).

The lawmakers in the states should check the excesses of their governors. They should cease being seen as subservient to the governors. Besides, the fragile state of our economy cannot sustain excessive borrowings. At the federal level, the picture does not look better either with rising debt profile and depleting foreign reserves. All hands must be on deck to avert the collapse of the economy