• Monday, December 02, 2024
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States’ debts seen rising on FX crunch amid lean revenue

States’ debts seen rising on FX crunch amid lean revenue

The foreign exchange crunch could create debt crisis for state governments as they grapple with low internally generated revenue (IGR) and high debt servicing costs.

BusinessDay’s analysis of states’ debt profiles, as published by the Debt Management Office (DMO), showed that as at December 2023, the total domestic debt of 36 states and the Federal Capital Territory (FCT) stood at N5.86 trillion while the foreign debt stood at $4.61 billion.

BusinessDay observed a sharp decline in value of total domestic debt owed by all 36 states and the FCT, which stood at N4.267 trillion as at the end of June 2024. However, total foreign debt for the 36 states and the FCT rose to $4.89 billion in the period from $4.61 billion in December 2023.

Experts who spoke with BusinessDay said that naira slump has ensured that states’ foreign debts have more than doubled in naira terms in one year, putting a strain on the finances of subnational governments in terms of loan repayment.

“What should be of concern to the state governments is the foreign component of their loans because some of their debt profile has escalated or became elevated as a result of the external debt commitment. The depreciation in the exchange rates has significantly escalated their debt profile. Imagine a state that took a foreign currency loan at maybe N200 or N300 to the dollar. Now, it has to service the same loan at around N1, 600 naira to the dollar. You can imagine the pressure,” Muda Yusuf, chief Executive officer, Centre for Promotion of Private Enterprise (CPPE), told BusinessDay.

Read also: Nigeria’s debt to IDA jumps to $17bn in three months

Speaking further, Yusuf noted that poor revenue generation capacity of most state governments is affecting their financial health.

“So quite a number of the state resources, which normally should have been used to develop their states, are being used to service debts. So that is the major challenge. And many of the states don’t have very strong internally generated revenues,” he added.

According to the National Bureau of Statistics data, the total internally generated revenue by the 36 states stood at N3.53 trillion in 2023, with a total FAAC allocation of N5.4 trillion, bringing the total revenue to N8.9 trillion.

Revenues from the federal account has continued to form a major part of the revenue available to state governments, this is low revenue generation remain prevalent in most states.

Iniobong Usen, head of research and policy advisory, BudgIT, said that to achieve debt sustainability, states must curb their reliance on foreign loans, especially in the light of exchange rate volatility and shrinking fiscal space, to minimise exposure to unfavourable exchange rates.

He also stressed the need for states to establish robust frameworks for debt transparency and accountability, ensuring that borrowed funds are allocated to high-impact projects with clear economic returns.

Usen noted that the fiscal viability and long-term sustainability of states is dependent on their capacity to mobilise revenues internally.

“This capacity is crucial for financing essential infrastructure, investing in human capital development and social protection, meeting the new minimum wage and its consequential adjustments, and repairing the fractured social contract.”

Ishaq Ibrahim, an Abuja-based economist, said: “The state government is facing a new challenge as high foreign exchange (FX) rates have added to the already existing burden of a debt crisis. With revenue at an all-time low, the situation is becoming dire for the states.”

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