For Nigerian States, Mounting Debts May Lead to Serious Negative Reaction from the Populace

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In a recent interview with THISDAY, Governor of the Central Bank of Nigeria, Godwin Emefiele emphasised the need for states to repay their debts. According to him, there are two aspects to the debts owed by states. “There are intervention facilities granted by the bank and there are bilateral facilities granted by the deposit money banks to them. They went to deposit money banks, they asked for loans and signed the offer letters with those banks and they gave their Irrevocable Standing Payment Orders (IPSOs) to the Federal Ministry of Finance that on a monthly basis the Minister should deduct from their monies and pay the banks for the loans they had taken.

 

And I am aware that the banks had written to the Finance Minister and they had copied me that they want their money. If it was a bilateral loan, they should pay their loans. On the CBN intervention facilities to the state governments, we are engaging the National Economic Council (NEC) and the CBN is also insisting that its loans must be paid. But depending on the outcome of the discussion between the CBN, Minister of Finance and NEC, we would begin to take back the money we gave them,” he said.

With most Nigerian states depending on federal allocation and not economically viable, the possibility of repaying their debts may be foggy. Besides, the unprecedented impact of the Coronavirus pandemic on the economy has stalled the growth of the economy. The CBN rolled out intervention facilities to help cushion the effect of the pandemic, but the economy is yet to record significant growth. In the first quarter of the year, the economy recorded 0.5% GDP growth against 0.11 growth in the last quarter of 2020.

Nigeria’s total public debt as of December 2020 is N32.92 trillion

The National Bureau of Statistics in its Domestic and Foreign Debt report for Quarter Four, 2020, disclosed that 61.40 per cent of the public debt was domestic, that is federal and state governments. It estimated the total states and Federal Capital Territory (FCT) domestic debt at N4.19 trillion.

The top five states with the highest debt (in percentages) in the report were Lagos (12.15), Rivers (6.38), Delta (5.94), Akwa-Ibom (5.51) and Cross River (3.90).

Out of the top five indebted states, only Lagos generated the highest revenue as of half year 2020. Its Internally Generated Revenue (IGR) was N204 billion and was followed by that of Rivers, N64 billion, while in the bottom five, the South-east state Ebonyi made the highest revenue, N6.3 billion, more than its counterparts in the region.

The total FAAC federal allocation for 2020 was N2.3 trillion while the total revenue generated as of the half year 2020 stood at N612 billion, a far cry from the money expended to states.

Lagos state while announcing its budget plan for the year said that it was prepared to take on more debt due to infrastructural gaps and security needs. Its budget for 2021 was N1.163 trillion which was targeted at employment, infrastructural development, healthcare among others. As the commercial hub of the country, the state is poised to attract investors with the various infrastructural development programmes in place. Recently, it kicked off the Red Line Rail project as well as the launch of the First and Last Mile Buses to increase options of transportation for Lagosians.

In a similar vein, the Rivers State Government recently launched the Rivers Cassava Processing Company funded by part of the CBN intervention facilities accessed by the state. According to Emefiele, the state has so far accessed N13 billion through the various interventions of the apex bank.

The five least indebted states according to the report are Jigawa (0.74) N3 billion, Sokoto (1.01) N4.6 billion, Ebonyi (1.06), Katsina as at September 2020 (1.15) N5.5 billion and Yobe (1.31) N3.9 billion

However, of all the least indebted states, Ebonyi State seems to be diligent in improving the revenue of the state. The governor, Dave Umahi, is determined to turn the fortune of the state around for good with his development plans that cut across infrastructure, education and healthcare.

For states in the northern region, security challenges may hamper any development plans they have.

As noted by an Economist Gospel Obele, the majority of states will have to run a productive economy to pay the debts back.

“Or they need to be making significant revenue that covers a good chunk of their expenses to be able to pay back. In a technical sense, most states will not be able to pay back.”

His thoughts were echoed by another analyst of the economy who preferred to go with an alias Kelechi Lekan due to workplace rules.

“Essentially, I don’t see the possibility of the state governments paying that loan in the short to medium term. I equally don’t see the CBN extending a waiver for the state governments too. If the CBN is to push with this idea of recovering the loans from the state governments, they would have to do so probably in collaboration with FAAC to deduct at source allocations for states for each month but that will lead to serious backlash between the FG and the state governments.”

Even with states like Lagos and Rivers which seem to have a productive economy, the possibility of them paying back loans remain slim.

“Except for Lagos, Rivers, and FCT, other states rely on FAAC for 80 per cent of inflows to meet their fiscal obligations. Even though the improvement in oil prices and, in turn, rise in government oil revenue, means the allocation of FAAC will consistently provide some form of respite to the state government in the short to medium term, other sources of inflows such as PAYE, Road taxes, MDAs revenue are gradually drying up. By implication, most states will continue to grapple with fiscal challenges, and obviously would not be able to comply with the CBN’s directive to pay up their debts within a short period,” argued Temitope Omosuyi, an investment strategist with Afrinvest.

Already, with the economic situation and the dwindling FAAC allocation, states are beginning to feel the weight such that they are resorting to cutting costs. A good example was recently seen in the dispute between labour workers and the Kaduna State government

In the coming days, we are likely to witness more industrial action by workers in the public sector bent on collective refusal to work under the conditions required by state governments. This may be due to a number of reasons, but it will be principally a reaction to dwindling resources available to state governments. Many state Chief Executives will offer conditions that are not negotiable to their employees and their plain indifference to the workers reaction may lead to protracted face-off that will further worsen the situation.

“The dire state fiscal position has been further reinforced by the recent sack of workers in Kaduna State which snowballed into industrial action by the Nigeria Labour Congress (NLC). Ekiti State has also hinted at cutting workers salaries. Sadly, the majority of the state governments have barely been able to pay the previous minimum wage of N18,000 let alone the new one of N30, 000,” said Lekan.

In his view, the CBN directive may likely fall on deaf ears and can also be seen as “somewhat a witch hunt following Edo State Governor Godwin Obaseki’s allegation that the CBN printed money to augment FAAC allocation.”

The Edo State governor had earlier raised the alarm that the CBN printed money to augment the shortfall in the distribution of federation revenues to the three tiers of government in March 2021, although CBN has long debunked the claim.

However, the implication of states not paying their debts will reflect in the debt profile of the country which will continue to spike.

“This will be left for generations to offset,” said Obele.

Obele explained that one of the reasons states keep piling up debts is because
“They have not been able to deploy initial development financing that we have accessed in different states into the core developmental needs of those states and until the debt is deployed correctly we will not be able to get enough productive returns that will position us to pay this debt later.

“It’s like fetching water with a basket. States have collected so much money and with the huge cost of governance, government waste and lack of clear development priorities, a lot of those monies are poorly used and we are back technically to structural issues and square one problems which include education, health, unlocking state and regional potential, fostering collaborations for development, enabling business environment among others. Development financing has not been fully deployed correctly into these areas and until we do so, we cannot unlock state potential for revenue generation and state prosperity. If this is not in place, the cycle will continue both at the state and federal level. CBN may likely provide a waiver or a structured loan repayment that may not see the light of day.”

The way forward is for governments to make their states economically viable. To do that, Omosuyi advised that the immediate challenges to attracting sufficient investors (both foreign and domestic) should be addressed by the Federal Government and can be successful with the support of state governments.

“At the moment, the major drawback to investment inflow is the consistent rise in the level of insecurity across the country. If the security of fixed capital cannot be guaranteed, regardless of the attractiveness of the fiscal and monetary policy, no investor would want to commit their resources. Having addressed the security challenges to a comfortable level, state governments can now begin to look at areas where they have a competitive advantage, particularly in specific sectors or sub-sectors like crop production, livestock, mining, forestry, just to mention a few. Thereafter, they have to develop a roadmap to make these sectors efficient, viable, and globally competitive by addressing the challenges across the value-chain through technology, and, in any case, embrace partnership with the private sector,” he said.

QUOTE 1

With most Nigerian states depending on federal allocation and not economically viable, the possibility of repaying their debts may be foggy. Besides, the unprecedented impact of the Coronavirus pandemic on the economy has stalled the growth of the economy. The CBN rolled out intervention facilities to help cushion the effect of the pandemic, but the economy is yet to record significant growth. In the first quarter of the year, the economy recorded 0.5% GDP growth against 0.11 growth in the last quarter of 2020

QUOTE 2

The possibility of the state governments paying that loan in the short to medium term. I equally don’t see the CBN extending a waiver for the state governments too. If the CBN is to push with this idea of recovering the loans from the state governments, they would have to do so probably in collaboration with FAAC to deduct at source allocations for states for each month but that will lead to serious backlash between the FG and the state governments. Even with states like Lagos and Rivers which seem to have a productive economy, the possibility of them paying back loans remain slim

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