States’ rising foreign debt servicing bill

The bourgeoning foreign debt servicing bill of the 36 states is disturbing and must be checked before it leads to debt overhang. The unbridled borrowing by the state governments will soon spiral out of control if there is no moratorium on the practice. According to data from the Federation Accounts Allocation Committee (FAAC) released recently by the National Bureau of Statistics (NBS), the 36 states spent N235 billion in the first half of 2025 on servicing external debt obligations. 

The amount represents an increase of N95.65billion or 68.4 percent when compared with the N139.92billion recorded in the same period in 2024. This also reflects mounting pressure of dollar-denominated debt repayments on the states’ finances in the wake of the sliding value of the naira against major foreign currencies in the foreign exchange (FX) market. The repayment of these loans will affect the monthly allocation of the states from the federation account considering the fact that such debt will be serviced by the federal government through an irrevocable Standing Payment Order arrangement, which mandates automatic deductions from the states’ monthly FAAC allocation. 

We recall that the Fiscal Responsibility Act, 2007, requires that in the case of foreign currency borrowing, the federal government’s guarantee shall be a necessary requirement. At the same time, relevant sections of the Debt Management Office (DMO) specify that “government at all tiers shall only borrow for capital expenditure development, provided that, such borrowing shall be on concessional terms with low interest rate and with a reasonable long amortization (reduction of loan over a period of payment) subject to the approval of the appropriate legislative body, where necessary.”

Although it is not clear if this requirement is strictly followed by the states and the federal governments, the Office of the Accountant General of the Federation, the Federal Ministry of Finance, and the Central Bank of Nigeria deduct the agreed debt service from source before releasing the remainder to the affected states.      Available information from the DMO showed that some of the states spent between 190 and 300 per cent of their Internally Generated Revenue (IGR) on debt servicing in the first quarter of 2025. DMO statistics showed that Lagos state topped the list of states with the largest contributor to external debt servicing bill during the period under review. It spent a total of N49.58billion. This represents a 52.8 per cent increase from the N32.44 billion it spent in the corresponding period in 2024. It was quickly followed by Rivers, Kaduna, Ogun and Edo states with external debt servicing bill of N26.34billion, N24.47billion, N12.57billion, and N10.18billion, respectively. Cross River, Bauchi, Bayelsa and Adamawa states trailed behind. 

Collectively, these states spent N123.14billion or 52 per cent of all the external debt servicing payments in the first half of 2025. Consequently, the huge debt servicing bill might have exposed the states to external shocks that would hamper the development of the states. Jigawa State was at the lowest end of the ladder in foreign debt, having the smallest debt servicing bill of N1.39billion. It was followed by Benue State (N1.44billion), Yobe(N1.46billion). Other states with comparatively low exposure bill repayments included Borno, Zamfara, and Plateau.

Data from the Nigeria Extractive Industries Transparency Initiative (NEITI) reveals that the high foreign debt servicing by the states will strain their finances despite increased revenue from FAAC. This has raised concerns about their fiscal sustainability and ability of the states to fund critical projects that will impact positively on the welfare of the people.      All of this portends serious socioeconomic implications for the states. Without a significant increase in revenue generation, the rising debt servicing will likely crowd out spending on essential services and infrastructure. It could also hamper fiscal stability of the states in the future.

Undoubtedly, the present trend in borrowing binge, both from the domestic and external markets, does not augur well for the economies of the states unless they prudently manage their finances. They must imbibe fiscal discipline to avoid running into stormy waters with foreign lenders. Some African countries have had some of their assets seized by external creditors due to their inability to repay their loans. 

Let state governors enhance their IGR through investment in agriculture. Nigerian can earn enough foreign revenue through investment in palm oil, cocoa, coffee, sesame seeds and cashew nuts. If the borrowing spree of the states persists, most of their resources will be used to service debts. Federal and state governments must reduce their appetite for foreign loans and look inwards to develop the economy. Let there be prudent management of our resources at all tiers of government. Federal and state lawmakers should vet all loan requests before rushing to approve them.