Nigeria’s subnationals, under FX pressure, want suspension of foreign debt repayment
May 14, 2024471 views0 comments
ONOME AMUGE IN LAGOS, NIGERIA
Nigeria’s foreign debt stock has been on a steady climb over the past year, hitting $4.61 billion by the end of 2023, a 3.36 percent surge from the previous year’s $4.46 billion, translating to a $150 million rise in just 12 months.
However, the plot thickens as external debt servicing costs skyrocket, leaving many states in a financial squeeze. This is as servicing external debts from state allocations has soared 54 percent, swallowing up N120.01 billion, a leap from the N78 billion deducted in 2022. But that’s not the only cause for concern as this means that a substantial chunk of states’ allocations has to be devoted to debt repayment, rather than vital public services and development projects.
According to financial analysts, the substantial weakening of the naira is responsible for the recent surge in the value of sub-national external debt and associated servicing costs. Over a brief six-month period, the naira plummeted in value by 17.92 percent, closing out 2023 at N907 per dollar compared to N769.25 in June of that same year. The situation has only intensified as the naira currently trades above N1,300, exacerbating the expected increase in states’ external debt servicing costs.
The situation has become a double-edged sword for Nigeria’s economy, as the swelling foreign debt stock and its associated servicing costs put immense strain on state allocations. This financial conundrum is expected to worsen, with analysts predicting a continued weakening of the naira and higher servicing expenses in the coming months.
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Nigeria’s foreign debt crunch has begun to bite, as evidenced by Kaduna State Governor Uba Sani’s recent lamentation over his administration’s struggle to service the state’s swelling external debt.
Sani bemoaned the hefty debt inherited from his predecessor, Nasir el-Rufai, noting that his administration is now forced to sweat out nearly triple the amount borrowed, a fiscal burden that is draining resources that could otherwise be funnelled towards critical sectors. This financial strain is compounded by significant deductions from Kaduna’s monthly federal allocation, leaving the state with fewer funds for essential services and infrastructure development.
In a bid to find respite from the crushing burden of foreign debt, Ekiti, Cross River, and Ogun States proposed a suspension of their foreign debt repayments. The trio’s move comes as a desperate response to the severe foreign exchange volatility that’s left them reeling, with state officials pleading that the FX surge has hamstrung their ability to service existing debts.
According to data from the Debt Management Office, Ekiti, Cross River, and Ogun states are among the top 10 Nigerian states with the highest foreign debt stock as of December 2023. Their combined foreign debt repayments, totaling $501 million, highlight the severe impact of foreign exchange volatility on their fiscal stability. Cross River State bears the heaviest burden, with $211.13 million in foreign debt, followed by Ogun State at $168.8 million, and Ekiti State at $121.1 million.
Their proposal was revealed in the minutes of the Federal Account Allocation Committee’s March 2024 meeting, where representatives from the three states aired their concerns about the ballooning cost of foreign loan repayments due to the naira’s freefall. The states lamented that their share of the federation account, a vital lifeline of funds from the federal government, has taken a serious hit as the cost of foreign debt servicing spirals out of control.
Akintunde Oyebode, Ekiti State commissioner of finance, presented a compelling case for the proposed suspension of foreign debt repayments in the FAAC meeting minutes, adopted in April 2024. Oyebode decried the escalating financial strain from rising exchange rates that have sent the cost of foreign debt repayments through the roof.
Oyebode drew attention to the damaging impact of these rising costs on state finances. He argued that deductions from statutory revenue, intended for savings, have been taking an increasingly heavy toll on state balances.
The commissioner also made a strong case for a comprehensive discussion on exchange rates and multilateral financing, seeking solutions to alleviate the burden on states.
Michael Odere, Cross River State’s commissioner of finance, also voiced apprehension over the state’s capacity to fund critical capital projects in the face of declining revenues. Acknowledging the financial strain experienced by sub-national governments, Odere advocated for a strategic approach to fiscal management during periods of fiscal shortfall.
Central to Odere’s proposal is the suspension of specific deductions, including those for multilateral loan repayments, to alleviate the financial burden on states. Moreover, he stressed the importance of proactive communication between stakeholders, suggesting pre-FAAC meetings as a platform to collectively brainstorm solutions and navigate the challenges posed by dwindling revenue.
On his part, Dapo Okubadejo, Ogun State’s commissioner of finance, put forward a proposal to redistribute the N200 billion in savings back to the federation account, in a bid to provide much-needed relief to its beneficiaries.
Alongside this proposition, Okubadejo also addressed the pressing matter of multilateral financing, highlighting the necessity of implementing a system that effectively tackles the challenges arising from foreign exchange volatility.
Segun Orisabinone, Ondo State’s commissioner of finance, also raised concerns over the impact of extensive deductions on the federation’s revenue. In light of the low distributable revenue, Orisabinone called for a reversal of some of these deductions to ensure a more equitable distribution of resources among the states.
The FAAC minutes obtained by Business a.m., detailing the states’ arguments for an external debt repayment suspension read:
“The HCF, Ekiti State observed that there had been significant increases in the amounts deducted from the statutory Revenue of the states for repayment of foreign loans due to the rising exchange rate. He therefore suggested the need for extensive discussion on exchange rates in relation to multilateral financing in order to address the issue. Furthermore, he raised concerns on the amount deducted as savings from the revenue for the month, and noted that the balances of the sub-nationals had reduced tremendously as a result.
“The HCF, Cross River State expressed fear that the States might not be able to fund capital projects as a result of reduction in revenue. He advised that in view of the tight financial situation of the Sub-nationals, some of the proposed deductions should be suspended including repayment for multilateral loans. He also advised that whenever the total distributable revenue was low, a pre-FAAC meeting should be arranged with stakeholders to have a discussion on ways to manage the situation.
“The HCF, Ogun State on his part, proposed that the N200 billion set aside as savings should be returned to the Federation Account for distribution to the beneficiaries. On the issue of multilateral financing, he proposed that a system should be put in place to effectively address issues associated with foreign exchange volatility. The HCF, Enugu State noted that if more funds were made available to states for infrastructural development, the revenue earnings of the states would increase.”
Addressing the issue, Wale Edun, the minister of finance and chairperson of the Federal Account Allocation Committee meeting, acknowledged the pressing concerns surrounding foreign exchange, interest rates, and the broader economy. The minister noted that these matters are actively being discussed at the National Economic Council (NEC), urging FAAC members to convey their concerns and recommendations to NEC through their respective chief executives.
Stressing the importance of collaboration between monetary and fiscal authorities, Edun underscored that working together is key to achieving the shared objective of national development.