The Fiscal Responsibility Commission (FRC) recently reported that the debts of many states have exceeded their total revenues. Lagos, Osun, Cross River and Ogun, the report says, have accumulated debts that have exceeded their revenues by more than 400 per cent. In its 2019 Annual Report, titled: “Debt Sustainability Analysis of State Governments,” the FRC stated that the debts of the 36 states in the country, including the Federal Capital Territory (FCT), have also surpassed the accepted threshold set by the Debt Management Office (DMO).
According to the DMO guidelines, states that have the proportion of Debt-to-Revenue above 50 per cent are assumed to have violated Section F(C) of the Debt Management Guidelines. The reviewed guidelines on public debt gazetted in 2012, set the rules for assessing public debt in the country. Though the FRC report says that the debt situation of many of the states does not mean that they have over-borrowed, it however expresses concern that such situation portends danger for many state governments, as they may not be able to carry out basic financial obligations such as payment of workers’ salaries and pensions.
Lagos State, according to the report, accounts for the highest total net revenue as at the end of 2019, with 712.94 per cent. Osun State is second with 650.90 per cent debt-total-net revenue, while Cross River and Ogun states are third and fourth, respectively, with 597.36 per cent and 402.30 per cent. The states would have been living dangerously above their incomes, but for the fact that President Buhari is yet to sign into law the borrowing limits for the states as required by the FRC Act, 2007.
Nonetheless, the high debt profile and weak revenue base of the states is a sign that most of the states are fiscally distressed. Except Lagos, Ogun, Rivers and a few others, the Internally Generated Revenues (IGRs) of some states cannot sustain their financial obligations.
The rising debt among the states is disturbing. Last year, the Nigeria Extractive Industries Transparency Initiative (NEITI) stated that at least 15 states in the country faced imminent bankruptcy as a result of high debts and weak revenue generation. Also, data from the National Bureau of Statistics (NBS) between 2017 and 2018 revealed that the 36 subnational governments’ Internally Generated Revenue (IGR) was not more than N1.3trillion, with that of Lagos State exceeding that of 24 states put together. The implication is that the states can only generate about 15 per cent of their revenues and look up to the Federal Government for 85 per cent of their financial requirements. To make matters worse for the states, federal allocations are declining due largely to poor revenue generation and low oil prices in the international market.
It is also on record that the overall limits of the consolidated debts of the federal, state and local governments are yet to be set since the enactment of the FRC Act in 2007, even though the commission has engaged the Ministry of Finance, Budget and National Planning on the need to address the issue. In the absence of the limits, the FRC often resorts to using the threshold set by the DMO to determine the level of indebtedness of state governments, which should not be higher than 50 per cent of total revenue in a given year.
Unfortunately, this has been observed in the breach. Therefore, there is need for state governments to adhere strictly to the provisions of the Fiscal Responsibility Act on borrowing. The National Assembly should come up with a legislation that will stipulate more stringent conditions on how the states can abide by the Fiscal Responsibility Act and save themselves from debt overhang. It also appears that the state governments are not complying with the provisions of the Act, which in Section 44(1-5), Section 45(1) (2), stipulate conditions for borrowing, either from domestic or external market. Many states have apparently flouted these provisions as well as the recent guidelines issued by DMO on borrowing.
While there is nothing wrong with borrowing, it is important that the loans should be prudently used for projects that can repay them. State governments should avoid investing in worthless projects, and borrow cautiously. The present domestic indebtedness of most states may be due to misuse of funds by state actors. With the rising exposure to domestic debts, there is need for a comprehensive review of the process of contracting the debts. We advise state governors to prudently manage the resources of their states and substantially enhance their internally generated revenues.