States’ Debt Climbs to N11.4tn Despite Higher Federal Allocations

According to data from the Debt Management Office (DMO), Nigerian states’ debt burdens surged to N11.47 trillion as of June 30, 2024, marking a 14.57% increase since December 2023.

This escalation in state debt occurs despite increased allocations from the Federation Account Allocation Committee (FAAC), suggesting that higher federal receipts have done little to alleviate debt pressures at the state level.

A notable factor in this debt surge is the sharp increase in external debt, compounded by the devaluation of the naira. Reports reveal that the external debt of states and the Federal Capital Territory rose from $4.61 billion to $4.89 billion, an increase of 6.14%. However, due to naira depreciation—moving from N899.39/$1 in December 2023 to N1,470.19/$1 by June 2024—this translated into a staggering 73.46% rise in naira terms, from N4.15 trillion to N7.2 trillion.

In contrast, states’ domestic debt decreased significantly by 27.12%, dropping from N5.86 trillion to N4.27 trillion. Despite this, a further N200 billion increase was recorded from March to June, marking a re-escalation in subnational debt following an earlier decline this year. Collectively, states and the Federal Capital Territory accounted for 8.54% of Nigeria’s total public debt, which stood at N134.3 trillion by mid-2024.

Debt Trends Raise Alarm

Amid concerns about sustainability, analysts highlight the ongoing devaluation of the naira as a key factor swelling debt in naira terms without a corresponding increase in real-dollar obligations. “The devaluation has made it increasingly difficult for states to manage their external obligations. What we’re seeing is a fiscal crisis exacerbated by an over-reliance on foreign debt,” said economist Paul Alaje.

In total, FAAC disbursements amounted to N3.473 trillion in the second quarter of 2024, reflecting a slight increase over the previous quarter. Of this, the federal government received N1.102 trillion (33.35%), states collectively received N1.337 trillion (40.47%), and local government councils shared N864.98 billion (26.18%). Additionally, nine oil-producing states were allocated N169.26 billion from mineral revenue.

“The increase in FAAC disbursements is essential for subnationals,” said Victor Muruako, Chairman of the Fiscal Responsibility Commission, “but spending discretion at state and local levels poses significant fiscal risks.”

Despite these gains, debt service costs are consuming up to 80.7% of Internally Generated Revenue (IGR) across several states, leading to a deficit in revenue available for developmental purposes. This reality poses a challenge for the sustainability of such high debt levels, especially for states already struggling with low IGRs.

State-Specific Debt Shifts

While some states witnessed decreased debt profiles, others saw significant spikes. Rivers State, for instance, recorded a 67% increase in its debt within three months, jumping from N232.58 billion in March to N389.20 billion in June. Taraba and Niger states also saw their debt rise dramatically, with Taraba experiencing a 160% increase and Niger a 70% hike over the same period.

Conversely, some states achieved notable debt reductions. Delta State, one of the states with the highest initial debt, managed a 9% decrease from N334.90 billion in March to N304.54 billion in June. Lagos State, which continues to bear the highest debt burden among states, reduced its debt by 5%, lowering its domestic debt from N929.41 billion to N885.99 billion during the same period. Similarly, Bayelsa and Ebonyi states saw 6% and 9% reductions, respectively.

External debt reductions were also recorded, with Enugu and Gombe states making the most substantial cuts. Enugu reduced its external debt by 32.83% from $120.45 million to $80.91 million, while Gombe slashed its debt by 35.49%, decreasing from $54.88 million to $35.40 million.

Despite these efforts, certain states continued to rely on external debt. Rivers State’s external debt rose by 151.8%, from $80.94 million in December 2023 to $203.81 million by June 2024. Borno and Katsina states followed suit, experiencing external debt hikes of 136.9% and 124.57%, respectively.

Experts Voice Concerns Over Governance and Accountability

The Fiscal Responsibility Commission has raised concerns about the unsustainable trajectory of Nigeria’s fiscal federalism, which gives states significant leeway in their financial management.

At a recent event on transparency and accountability, Chairman Victor Muruako warned, “The discretion enjoyed by states and local governments in financial management could jeopardise the country’s economic stability.”

Economist Segun Ajibola of Babcock University echoed these concerns, highlighting the persistent issue of high governance expenses at the state level.

“State assemblies have largely abandoned their oversight roles,” Ajibola argued. “This has allowed governors to operate with minimal transparency, resulting in unsustainable spending patterns that do not directly benefit grassroots citizens.”

Ajibola’s remarks reflect growing apprehension about governance standards and the need for accountability mechanisms at the sub-national level. With debt servicing obligations rising, Alaje emphasised the need for stringent audits and investigations into how states utilise borrowed funds. He noted, “Governors must be accountable for their spending, especially when taking on loans that will burden future generations.”

This sentiment was recently reinforced by Kaduna State Governor Uba Sani, who lamented the crippling debt inherited from previous administrations.

Sani noted that the existing debt profile has constrained his administration’s ability to pay salaries and limit additional borrowing, presenting a significant financial challenge over the past nine months.

Economic Outlook

The data paints a worrying picture of Nigeria’s financial health, with a spiralling debt burden amid rising federal allocations. While higher oil prices have bolstered FAAC allocations, this boost has not led to a corresponding reduction in debt levels for most states.

Experts caution that unless structural reforms are undertaken to address fiscal irresponsibility and improve oversight, Nigeria’s subnational debt profile will continue to worsen, ultimately impacting the nation’s economic stability.

With debt burdens weighing heavily on state economies, stakeholders call for a rethink of Nigeria’s fiscal policies. As allocations from oil revenue remain volatile, prudent fiscal management, transparency, and accountability are critical to preventing an unsustainable debt crisis.