The external debt of state governments amounted to US$3.57bn at end-December. It declined by US$90m over six months: this fall reflects not the fiscal prudence of the states but that of the FGN, which guarantees these obligations and clearly has reservations on credit grounds. The background is well known: that the slide in the oil price since mid-2014 has exposed the dependence of most state governments on the monthly distribution by the Federation Account Allocation Committee (FAAC) and their limited efforts to raise internally generate revenue (IGR).
Predictably Lagos State accounts for 39% of the debt burden, and no other state more than 10% of the total. Lagos has a higher credit rating by virtue of its track record in fiscal management and of the concentration of businesses subject to tax in the state.
States’ borrowings are multilateral other than US$190m supplied by the Agence française de développement, the French state investment bank.
Their access to domestic funds has also been trimmed by the FGN’s insistence on best practice. The ongoing refund of debt service overpayments to the Paris Club is subject to reconciliation of the claims by the DMO and the Office of the Accountant General of the Federation. The payments were deducted from the monthly FAAC payouts as a first-line charge.
Sources: Debt Management Office (DMO); FBNQuest Research
The states’ escape from their fiscal vulnerabilities is through the development of IGR. Lagos has the best record but others have good news to share. Kwara achieved an impressive increase from N7.1bn to N17.2bn in 2016. For states with few businesses and low household incomes, the route is more challenging.
