Very Heavy Debt Burdens for Most States

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The external debt of state governments is contracted on non-market terms with official creditors. It has to be approved in advance by federal agencies such as the DMO and is heavily skewed towards those states favoured for their policy, governance and operational management by the donor community.

Lagos State naturally tops the list due to its capacity to generate revenue, and its efforts to provide transport and other services to its population. Kaduna and the other states featuring in our chart can be associated with current and/or previous governors with developmental agendas.

The remaining 31 states plus the federal capital territory were externally indebted at the end-2020 to the tune of USD2.14bn, implying an average of less than USD70m per state. The total debt of the subnational rose by 4.6% y/y from USD4.56bn at end-2019.

External debt of state governments, Dec ’20 (% shares) Total USD4.77bn

Debt
Sources: Debt Management Office (DMO); FBNQuest Capital Research

Their total external indebtedness of USD4.77bn was 93% due to multilateral creditors (principally the World Bank and African Development Bank groups). The Agence Francaise de developpement, the French state development bank, accounts for most of the bilateral lending of USD310m, disbursing to eleven different states.

The domestic debt of the states is larger, amounting to the equivalent of USD10.20bn at the end-2020 and more widely distributed. Lagos again tops the table but with a far smaller share of 12.2% of the total. The other states heading the league tend to be oil producers such as Delta and Rivers.

The domestic debt stock was growing rapidly until the first Buhari administration, which introduced controls on new commitments and arranged a swap of states’ bank borrowings for FGN long bonds. The growth slowed to 1.9% y/y in 2020.

Taking the external and domestic debt together, Lagos was the most indebted at end-2020 (USD2.65bn), followed by three in the USD650m-USD750m range (Delta, Kaduna and Rivers).

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Federal agencies are containing the growth of subnational debt for reasons of best practice. They know that the repayment capacity of most states has shrunk in the past decade and that the monthly payout by the Federation Account Allocation Committee falls well short of states’ spending in aggregate (Good Morning Nigeria, 30 April 2021).