There have been concerns raised about debt sustainability at the state government level, owning to their inability to meet certain statutory obligations such as regular salary payment to civil servants, timely payment of contractors’ fees, among others. BusinessDay Research and Intelligence Unit (BRIU) is of the view that while the total debt obligations among states are not the same, there is need for some states to revisit the management of their finances.
Debt financing has become a major fiscal policy instrument used by the Nigerian government at all levels in order to undergo capital projects that are not within its financial capacity. Debts are usually time-bound and require that the government repays the loans along with the specified interest at the end of the agreed period.
The government can either borrow domestically by selling treasury securities to the public or by borrowing from the Central Bank. Also, the government can also engage in external borrowing, although the downside risk from external borrowing is that the loan has to be repaid in the foreign currency, particularly the US dollar.
According to the Debt Management Office (DMO), Nigeria’s total debt stock rose by 13.78 percent to N22.3 trillion in H1 2018 from N19.6 trillion in H1 2017. The composition of the debt stock shows that domestic and external debt accounted for 70 percent and 30 percent of total debt respectively.
Further breakdown of the debt stock by states reveals terrifying numbers that suggest that the debt level across the 36 States in Nigeria is largely unsustainable based on the amount of internally generated revenue (IGR).
Statistics from the DMO and the National Bureau of Statistics (NBS) shows that Lagos State has the highest amount of debt totalling N961.1 billion as at the end of the June 2018 compared to an IGR of N196.3 billion during the same reference period. Delta State has the second highest debt amounting to N242.2 billion as against an IGR of N29.8 billion during the same period.
The other seven states with the highest debt in Nigeria as at H1 2018 were: Rivers, N215.5 billion; Akwa Ibom, N194.5 billion; Cross River, N184.2 billion ; Osun, N166.8 billion; Edo, N154.3 billion; Ekiti, N147.7 billion; Kaduna, N146.8 billion and Bayelsa, N140.5 billion.
When comparing the top 10 states with the highest debt to the 10 top states with the highest IGR, it can be seen that only Lagos, Rivers, Delta, Akwa Ibom, Edo and Kaduna states feature in both categories leaving out Cross River, Osun, Ekiti and Bayelsa, thereby questioning the debt sustainability level of these four states based on their IGR.
To assess the capabilities of the states to manage their debts, each of the states’ IGR is compared to their total debts derive the debt-to-IGR ratio. This ratio is similar to the debt-to-income ratio that is used by financial institutions to determine an individual’s ability to manage current debt position based on the income earned.
Likewise, the debt-to-IGR ratio measures the capacity of Nigerian states to manage their debts based on the income generated within the state (IGR) excluding allocations from the federal government.
A low debt-to-income ratio signifies that there is a good balance between debt and income, whereas a high debt-to-income ratio shows that a state has too much debt for the amount of income earned. The Centre for Economic Policy Research along with several empirical papers from the International Monetary Fund (IMF) recommends a maximum debt-to-GDP ratio of 183 percent for developed and developing economies.
Table 1 presents information on the states with the highest debt-to-IGR ratio. Unsurprisingly, Ekiti State has the highest ratio with about 5,380.12 percent followed by Osun State with a ratio of 3,495.65 percent and Kebbi State having 3,351.05 percent as at H1 2018.
This means that based on these ratios, States like Ekiti and Osun are likely to fall behind in debt repayment because there IGR is too low to adequately manage the huge amounts of debt acquired. In order to reverse this trend, these states will have to increase their IGR. In the absence of no revenue from FAAC, Ekiti State has to increase its IGR by 54 times to be able to offset the current level of debt, provided it does not increase the current debt level. Similarly, Osun State has to increase it IGR by 35 times while Kebbi State has to increase its IGR generation by at least 34 times.
Conversely, Ogun, Rivers, Lagos, Anambra and Kwara had the lowest debt-to-IGR ratio during the reference period of about 322.56 percent, 353.76 percent, 489.39 percent, 501.69 percent and 554.99 percent, respectively. Nationwide, the average debt-to-IGR ratio as at H1 2018 was about 1,677.29 percent across the 36 States and 17 states are above the nationwide threshold.
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