Nigeria’s debt management office (DMO) has taken a step to curb the high level of indebtedness of state governments by issuing a directive to deposit money banks stating that credit facilities by banks or the bond market must not be honoured without the express approval of Nigeria’s minister of finance.
Nigeria’s domestic debt was recently reported to have risen by N1.64 trillion in the past three years, on account of borrowing the 36 states of the federation and the Federal Capital Territory.
Speaking on the issue, Patience Oniha director-general DMO, said: “Some banks lent to some states without the approval of the minister of finance. We could have simply told the banks to go and write off the debts, because they did not comply with due process. We looked at the impact this could have on the economy and waved it aside.
“Now, no bank needs to be told that the minister of finance must give her express approval before it can lend to a state government. The minister of finance gets a letter from the state governments seeking for loans; the DMO is copied,” she said.
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She further explained that when the minister gets a letter, the minister will minute it to the DMO for proper advice and the DMO will look at the indebtedness of the state to check how much it costs them to service the debt already in their portfolio.
“The criterion is that the cost of servicing the debt, including the new one being requested, should not be more than 40 percent of their revenue in the past 12 months. What we recognise as the states’ revenue is what they receive on monthly basis from the Federation Account, because this can be easily verified,” she explained.
Oniha disclosed that the DMO recently turned down requests to borrow from a few states because approval would have taken them beyond the threshold of servicing debts with more than 40 percent of the revenue.
In a few cases, the DMO has had to advise the states to reduce what they wanted to borrow to ensure that it stayed within the limits stipulated by the subnational borrowing guidelines articulated by the agency.
The guidelines are necessary given the country’s recent experience with an unsustainable public debt portfolio, and the need for measures taken to prevent a relapse into debt unsustainability.
“This challenge is quite demanding, because the federal and state governments need to mobilise substantial resources in order to fund the growth and development of the economy. In this context, it is necessary to have subnational borrowing guidelines in addition to the existing borrowing provisions, so that the states could be assisted to be prudent in their borrowing and debt management activities,”Oniha said.