Published On: Sun, Apr 8th, 2018

States struggle for breath as debt balloons


States across the country are struggling for breath as their domestic and international debts continue to balloon. Not only are escalating debts stalling the completion of critical social infrastructure but they are also posing major problems for the meeting of recurrent expenditure in respect of salaries and pension obligations.

.State Governors at a public function courtesy

The skinny size of the Internally Generated Revenues (IGRs) of several states has thrown up a fiscal challenge that is turning from being a problem into a fiasco. Only five states have a debt-to-revenue ratio of below 100 per cent with Anambra having the lowest of 49 per cent, while its debt-to-IGR stood at 166 per cent at the end of 2017. Yobe, Sokoto, Jigawa and Katsina were the other states that have maintained a relatively low debt profile.

The debt burden of states swelled 18.63 per cent year-on-year (y-o-y) to N3.35 trillion in 2017, while the country’s total obligation to creditors shot up 25.15 per cent y-o-y to N21.37 trillion during this period, raising fresh fears of debt overhang.

The country spent N1.48 trillion to service its domestic debts in 2017, which was 20 per cent more than the N1.23 trillion it spent in 2016.

“Some states are not sustainable. They fail to apply creativity in generating revenue. They just depend on federal allocation for survival. I have previously made arguments that there is a need for the merger of states or we go back to a regional government structure, because some states are just making the numbers. This is why things are so hard and people are not getting the benefits of democratic governance,” explains Ambrose Oruche, an economist and director, Corporate Affairs, Manufacturers Association of Nigeria (MAN).

No state in the country except Lagos and Rivers that can survive independently of the national Federation Account Allocation Committee (FAAC) monthly largesse, asserts Dr Adi Bongo, Faculty member, Lagos Business School. “As long as the states continue to get allocation from the federal government, and oil prices remain high, they will keep behaving in a fiscally questionable manner. It is when states get denied federation account funding because of oversized debts, then, we will begin to see fiscal imaginativeness at the local levels of governance, the dependency monster may finally be splayed and slain,” he noted.

Only Lagos which generates 36 per cent of all state IGR funds has internally generated revenue of N333.97 billion, which was higher than its federal account allocation of N89.69 billion in 2017. But the nations commercial hub is equally highly geared with massive debt liabilities of N810.47 billion, amounting to a debt-to-IGR ratio and debt-to-total revenue ratio of 191 per cent and 243 per cent respectively.

It has the largest budget of all states in the federation at N1.46 trillion for 2018 with a staggering N347.04 billion going into recurrent expenditure, while N699.08 billion is expected to be spent on capital projects.

The pressure to increase revenue has propelled Lagos to ramp up its land use charge between 100 and 400 per cent and raise toll gate fares between 40 and 70 per cent, causing Lagosians to protest angrily for a downward review of the rates and charges.

The high debt profile of states may adversely affect their capacity to raise more fund from the debt market, says Chidi Ajaegbu, CEO Heritage Capital Market Limited. “High debts to revenue ratios also reduce their credit ratings, meaning they are going to pay more to borrow, because when your rating drops, it becomes a riskier loan. Borrowing more expensive money, will leave them with little or nothing for capital projects,” he added.

Indeed worried by the rising debt burden of states, the Senate had to turn down a recent $350 million loan request of Kaduna State, which has the 8th largest debt stock of all the states in the country at N156.50.  The legislators claimed the state was already overleveraged.

Other states that generated significant IGRs that could offset recurrent obligations are Rivers and Kano. While the former boasts of generating 43 per cent of its N209.12 billion revenue internally, the latter raked in 39 per cent of total revenue of N107.56 billion as IGR last year. Meanwhile, Rivers has the third largest state debt stock of N211.52 billion, lagging behind Lagos and Delta with N810.47 billion and N246.14 billion.

Osun which was one of the four states whose IGR dipped last year has, according to analysts, a worrisome debt-to-total revenue ratio of a stunning 991 per cent and a debt-to-IGR ratio of a mind-twisting 2,585 per cent. It has been paying certain categories of its public workforce half salaries for more than two years.

The vulnerability of states in the country can be explained by a 16 month recession the prevailed between 2016 and the first quarter (Q1) of 2017 as most states couldn’t pay workers. To be sure, many of them had to be bailed out by the federal government on different occasions.

Nevertheless, states have been making frantic efforts to improve their IGRs. States’ total IGR went up by 12.03 per cent in 2017 to N931.23 trillion from N831.19 billion in the previous year. Ebonyi recorded the most significant improvement in IGR last year, growing its IGR by 117.88 per cent to N5.1 billion.

Bayelsa which is the ninth most indebted state shored up its IGR 58.42 per cent to N12.52 billion in 2017 and the state looks forward to further improvement in 2018. Most of the state’s huge debt of N144.04 billion was inherited from past administrations, Daniel Alabrah, special adviser, Public Affairs to Governor Seriake Dickson of Bayelsa State explained to Business Hallmark. He added that the government has been making efforts to cut down the state’s debt to revenue ratio.

He also mentioned that the Bayelsa State government has gotten more people into the tax net and blocked revenue leakages, resulting in a current N1.1 billion average monthly IGR.

Besides states being choked by huge debt there have also been worries over the surging national debt. The federal government spent 71.9 per cent of the country’s revenue to service debt in 2017, according to Bismarck Rewane, CEO, Financial Derivatives Company Ltd. He projected that this would decline to 59.7 per cent this year as the government reduces its expensive local debts.

Nigeria’s external debts has increased 14 per cent in the first quarter of 2018 to $45.4billion compared $40 billion at the end of last year.

Fears rife that if the upward trend of the county’s debt is not checkmate, it would in no time returned to the debt overhang it escaped in April 2006.

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