Rising domestic debt of state governments

The rising domestic debt of state governments, without much to show for it, is indeed worrisome. This is against the advice of local and international financial institutions against borrowing beyond the allowed threshold. While the size of the federal government’s debt is still within the borrowing threshold, the domestic debts of the 36 states of the federation and the Federal Capital Territory (FCT) have reportedly increased so alarmingly that servicing them has become a real challenge.

According to latest statistics from the Debt Management Office (DMO), the 36 states and the FCT have increased their domestic indebtedness from N1.71trillion as of December 2014 to N3.35trillion as at end of 2017. This shows that the state governments raised their domestic borrowings by N1.64trillion within a three-year period, 2014-2017. This amounts to an increase of 95.9 per cent in the local debts within the period. The increase in the domestic debt profile of the state governments is largely due to their resort to borrowing from the debt market and the negative impacts occasioned by high interest rates, resulting in huge spending in servicing the domestic debt. Many Nigerians are worried by the rising domestic debts not necessarily because borrowing is bad, but because many of the states have not shown what they have done with the money and how the debt will be paid.

With many of the states financially distressed and barely surviving on funds from the Federal Accounts Allocation Committee (FAAC) every month, and paying as much as N500million monthly for debt servicing, there is urgent need for a comprehensive review of the process of contracting these debts. So far, the process has been non-transparent and most of the states breach the provisions of the Fiscal Responsibility Act, which seek to promote prudent and transparent fiscal management and limits on borrowing.

Figures from the National Bureau of Statistics (NBS) show that no fewer than 15 states of the federation face imminent bankruptcy. There is, therefore, urgent need to strictly adhere to the provisions of the Fiscal Responsibility Act (FRA), on borrowing and save the states from financial collapse. The National Assembly should come up with a legislation that will stipulate more stringent conditions for states to borrow money. It is disheartening that despite ample provisions in the Fiscal Responsibility Act, which stipulate conditions for borrowing and verification of compliance limits, the states’ domestic debt stock continues to rise. For instance, Section 44 (1-5), and Section 45 (1) (2) provide conditions for borrowing, the purpose and the penalty for contravention of these provisions. However, figures from both the DMO and NBS show that borrowings by state governments have been in excess of the limits set out in Section 44 of the Act.

The data from DMO show that the domestic debts of almost all the 36 states have exceeded 50 per cent of their annual revenue. This is against the guidelines of the FRA, which stipulate that the debt status of every state of the federation should not exceed 50 per cent of its statutory revenue in the previous year. Most states are reported to have far exceeded this threshold, ostensibly to finance their budget deficits due to declining Internally Generated Revenue (IGR) and allocation from FAAC.

With the states’ increasing exposure to domestic debt market, we urge the DMO and the Central Bank of Nigeria (CBN) to stem the rising debts of the states and ensure sustainable debt management. On their part, the state governors should be aware that state funds and borrowings should be put into judicious use through investment in public infrastructure. Such funds should not be misappropriated or diverted to other use, as some of them are alleged to be doing.

The way to avoid a possible debt overhang is for the state governments to scale down domestic borrowing and invest in projects that will have multiplier effects on their economies. This advice also applies to the Federal Government because its domestic debt has increased from N7.9trillion to N12.59trillion from 2014-2017. This represents 59.37 per cent rise or N4.69trillion.

Therefore, innovative measures should be put in place to improve the financial profiles of the states and make them less dependent on the monthly allocations from the FAAC. The states should turnaround their present beleaguered financial status and restructure their domestic portfolios.