The Fiscal Responsibility Commission (FRC) has advised Deposit Money Banks not to lend money to any state government without its approval. The intervention is reportedly in line with the provisions of the FRC Act, 2007. According to the FRC, state governments should henceforth publish their budgets online annually. They are also enjoined to publish their budget implementation performance report online quarterly. These are some of the measures put in place to strengthen fiscal transparency, prudence and accountability in the states. Specifically, FRC stated, “no commercial bank should lend money to states without approval from the FRC, in line with the provisions of the Fiscal Responsibility Act.”
The agency also recommended that states should introduce public financial management reforms post COVID-19, such as Public Sector Accounting Standards, Treasury Single Account (TSA), and Government Integrated Financial Management Information System. These are tools the Federal Government has recently introduced to ensure transparency and accountability in payment processes.
Beyond that, the FRC recommended among other things, that states should sign up to the Open Government Partnership Initiative, as well as establish registers for the disclosure of information on beneficial owners of commercial entities to improve transparency and accountability in private sector governance. It also called for the domestication of the Act and the establishment of state branches of the commission.
We believe that the advice of the FRC to commercial banks on lending procedures to states is appropriate and consistent with its mandate. It is hoped that the new measure will help keep the states’ domestic borrowing within the allowed threshold.
Similarly, Section 45(1) of the FRA stipulates that “All banks and financial institutions shall request and obtain proof of compliance with the provisions of this Part before lending to any Government in the Federation.” Subsection (2) states that “lending by banks and financial institutions in contravention of this Part shall be unlawful” while Section 44(1-2) states that “any borrowing in the Federation or its agencies and corporations desirous of borrowing shall, specify the purpose for which the borrowing is intended and present a cost-benefit analysis, detailing the economic and social benefits of the purpose to which the intended borrowing is to be applied.”
In addition, Section 44(2) (a-b) requires the existence of prior authorisation in the Appropriation or other Act or Law for the purpose for which the borrowing is to be utilised and the proceeds of such borrowing shall solely be applied towards long-term capital expenditures. Undoubtedly, many states have acted in breach of these provisions while seeking for loans from the banks and even from the capital markets. Their action flouts Section 46 of the Fiscal Responsibility Act 2007, which mandates the Central Bank of Nigeria (CBN) to scrutinise the debt security of any government in the federation.
In view of the rising domestic debt of state governments, put at N4trillionn as at 2019, the intervention by the FRC has become necessary. And with many states financially insolvent and barely surviving on monthly allocations from the Federal Accounts Allocations Committee (FAAC) and bailout, it has become imperative that banks should get the approval of the FRC before lending to states. In fact, the insolvency of most of the states underscores the urgent need for them to design strategies that will boost their Internally Generated Revenue (IGR) rather than resorting to binge borrowing. To avoid debt overhang, due diligence by FRC is critical.
Even though there is nothing wrong with the state governments borrowing money from the banks, or from any financial institution, the problem is lack of prudence in managing the loans. At times, such loans are lavished on frivolities or unnecessary projects to the extent that their repayment would be difficult. Sadly, many states governors have not been prudent in managing such loans. Data from the Debt Management Office (DMO) shows that domestic debts of almost the 36 states and the Federal Capital Territory (FCT) have exceeded 50 per cent of their annual revenues, thereby increasing their domestic debt exposure.
Also, the COVID-19 pandemic has worsened the revenue generation of the federal and state governments. With the looming recession, the states should be circumspect in borrowing from the financial institutions. And if they must take loans from the banks, they must strictly follow the stipulated guidelines and laws.