Since July 2015 the FGN has delivered six separate programmes to ease the pressure on state government finances. It moved in response to the slide in oil prices one year earlier, which highlighted the dependence of most states on their monthly payout from the Federation Account Allocation Committee (FAAC) and their failure to develop taxable local economies. The FGN also recognised that money in circulation and spending power would be boosted if the states were able to resume full payment of their employees’ salaries and pensions.
The impact of the FGN’s debt relief has been limited. BudgIT, the independent fiscal research body, estimated that in June this year 20 of the 36 states were still in arrears of some description of their payments. We have turned therefore to the 2017 edition of its State of States report in search of an explanation. We welcome the report for its pulling together of data from selected sources, although not the CBN, and for the snapshots on each state with suggestions on where they might be able to help generate investment, which should eventually create internally generated revenue (IGR) for their use.
These BudgIT reports are best known for the fiscal sustainability index. Because these are useful indices, unlike several in circulation, state governors sit up and take notice at the placing of their states. A low position in the league table should prompt them to complain to BudgIT and, if possible, rebut the findings.
For this column, our interest in the report lies in states’ debt obligations. The debt mountain of Lagos State looks huge in isolation: N735bn at end-2016, consisting of N312bn naira-denominated and N423bn in fx debt. The mountain looks less daunting when we study its constituent parts. The fx debt is more than six times that of any other state but is all due to multilateral and bilateral agencies at below-market rates. We should add that all external debt of states is guaranteed by the FGN and therefore subject to greater scrutiny, we suggest than that of loans from commercial banks.
We should also allow for the fact that Lagos State has borrowed N215bn domestically in the form of bonds. This issuance has to be approved by the Debt Management Office and the Securities and Exchange Commission, so our point about scrutiny above again applies. Lagos is the only state government to issue bonds that the offshore portfolio investor would consider buying. Further, external rating agencies have Lagos on a par with the FGN and it will soon have access to the 13 percent derivation formula as an oil-producing state.
Source: Business Day, HERE