States owe CBN N1.24trn as FAAC disappoints

Amid the decline in the revenues disbursed to them by the Federal Accounts Allocation Committee (FAAC) in recent months, the total debt owed by states to the Central Bank of Nigeria (CBN) has increased to N1.24 trillion.

In November last year, President Muhammadu Buhari approved a N656 billion bridge financing facility to the 36 states to help them meet financial obligations, especially the previous budget support facility due for repayment.

Zainab Ahmed, minister of finance, budget and national planning, said the loans would be given to states “over a period of six months towards cushioning the effects of their resumption in the repayment of the three federal government bailout facilities (salary bailout, excess crude facility and budget support facility)”.

Data obtained from the CBN showed that the states started borrowing from the apex bank in April 2016, with the total loan put at N14.58 billion at the time.

The debt owed to the central bank jumped to N300.38 billion in December 2016 and N590.42 billion at the end of 2017.

Following the collapse in global oil prices, the country slipped into recession in the second quarter of 2016 and emerged from it a year after.

States’ debt to the central bank declined gradually to N600.62 billion in October 2021 from N614.92 trillion in September 2019, but jumped to N700.47 billion in December last year. It rose further to N1.24 trillion in June this year, according to the latest data from the CBN.

The revenues shared by the federal, state and local governments in the first quarter of this year fell to N2.18 trillion from N2.46 trillion in the previous quarter, according to the National Bureau of Statistics.

The disbursement by FAAC to states declined to N590.45 billion in the first quarter of this year from N640.16 billion in the previous quarter.

“A decline in the FAAC allocation would exacerbate the state governments’ financial difficulties, resulting in salary cuts and staff layoffs, which will likely affect aggregate demand and consumption levels as income levels remain squeezed,” analysts at Financial Derivatives Company Limited, led by economic expert Bismarck Rewane, said.

The decline in FAAC allocation comes as the Nigerian National Petroleum Company failed to make any remittances to FAAC this year, with monthly deductions from net oil and gas revenues to fund petrol subsidy.

Petrol subsidy, which the national oil company preferred to call “value shortfall” or “under-recovery”, gobbled up N1.27 trillion in the first five months of this year, according to data from the NNPC.

The finance minister said last week that the transition of the NNPC to a commercial entity had raised the expectation that the huge subsidy bill could be offset through royalties and taxes from the company as it would no longer make remittances to FAAC.

“NNPC will be paying royalties, dividends and taxes; so while the revenue might not be monthly, we will work out an arrangement with them on how this will be paid. It is possible to work out an arrangement where the payment could be made to the federation either monthly or quarterly,” she added.

Akpan Ekpo, a professor of Economics and Public Policy and former member of the CBN Monetary Policy Committee, said the states’ borrowing from the apex bank showed they are financially distressed.

“Only Rivers, Lagos and Kano are economically viable while the others are largely dependent on the federal allocation,” he said. “These states have to look for ways to generate more internally generated revenue to reduce their reliance on FAAC and borrowings.”

“It’s a cycle for the government to lend money to states to pay their previous loans. This is a cycle that does not make sense,” Ekpo added.

Read also: Inflation: Doubts raised over effectiveness of CBN’s rate hikes

The World Bank had warned last month that a fiscal time bomb could explode in Nigeria owing to the soaring petrol subsidy and plunging crude oil production in the country.

“The worsening revenue collection at the federation level is increasing budgetary pressures for the states, and many states are in a precarious fiscal position. With net oil and gas revenues stagnating, most states will not be able to achieve their intended levels of expenditures in 2022,” it said.

Last week, the Federal Government revealed that its revenue exceeded debt service costs in the first four months of this year. Its retained revenue was N1.63 trillion, less than half of the N3.32 trillion budgeted for the period, but it spent N1.94 trillion on servicing debts.

Nigeria’s public debt stock rose by N2.04 trillion in the first quarter of this year to N41.60 trillion, according to the Debt Management Office (DMO).

The Federal Government borrowed N2.45 trillion from the CBN in the first four months of this year, bringing its total debt to the CBN to N19.91 trillion, data from the apex bank show.

“Policymakers’ options to plug a higher budget deficit will be few and far between, with some potentially damaging economic consequences. External borrowing costs have surged; sovereign dollar bond yields now stand at 13.2 percent, a level at which emerging markets have historically refrained from international debt issuance,” London-based Capital Economics said in a report on why Nigeria is struggling while oil prices are so high.

It noted that such unfavourable market conditions pushed the Nigerian authorities to drop plans to raise $950 million by issuing Eurobonds in the second quarter.

“And domestic borrowing costs are just as high, with the yield on 10-year government bonds reaching 11.2 percent. At the very least, increased government borrowing is likely to crowd out lending to the private sector. And, perhaps most worryingly, the authorities may be tempted to rely more on central bank financing,” it said.

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