State governments may experience a financial crisis due to the foreign currency crisis due to their low internally generated revenue (IGR) and high debt payment expenses.
As of December 2023, the entire domestic debt of 36 states and the Federal Capital Territory (FCT) was N5.86 trillion, while the total foreign debt was $4.61 billion, according to THE NEWS CHRONICLE’s study of state debt profiles, which was released by the Debt Management Office (DMO).
The entire amount of domestic debt owed by the FCT and all 36 states, which was N4.267 trillion at the end of June 2024, fell precipitously, according to TNC. Nonetheless, the 36 states and the FCT’s total foreign debt increased from $4.61 billion in December 2023 to $4.89 billion.
According to experts who talked to reporters, the naira downturn has caused states’ foreign debts to more than double in value in a single year, placing a burden on subnational governments’ ability to repay their loans.
“What state governments should be concerned about is the foreign component of their loans, as a portion of their debt profile has risen as a result of the external debt commitment. The depreciation of their currency rates has greatly increased their debt profile. Consider a situation where a state borrowed money at a rate of perhaps N200 or N300 to the dollar. It now has to service the same borrowing at a rate of almost N1,600 naira to the dollar. You can imagine the pressure,” Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise (CPPE), told reporters.
Yusuf went on to say that most state governments’ inability to generate enough revenue is impacting their financial stability.
“So many of the state resources that should have been used to grow their states are being diverted to settle debts. So that’s the major challenge. And many of the states do not have a significant internal revenue base,” he noted.
According to figures from the National Bureau of Statistics, the 36 states’ combined internally generated revenue in 2023 was N3.53 trillion. The FAAC’s overall grant of N5.4 trillion increased this amount to N8.9 trillion.
Low revenue production is still common in most states, and federal funds continue to make up a significant portion of the funds available to state governments.
According to Iniobong Usen, head of research and policy advisory at BudgIT, states must reduce their reliance on foreign loans to achieve debt sustainability. This will decrease susceptibility to adverse exchange rates, particularly given exchange rate volatility and dwindling fiscal flexibility.
In order to guarantee that borrowed money is used for high-impact initiatives with definite financial returns, he also emphasized the necessity for states to set up strong frameworks for debt transparency and accountability.
Usen pointed out that states’ ability to raise money internally determines their long-term viability and fiscal health.
“This capacity is essential for meeting the new minimum wage and its corresponding adjustments, investing in social protection and human capital development, financing essential infrastructure, and repairing the fractured social contract.”
According to Ishaq Ibrahim, an economist based in Abuja, “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 deteriorating for the states.”
