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States’ Debt Burden Essentially Domestic

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Thursday, December 07, 2017 / 9:35 AM /FBNQuest Research


In as much as they have limited alternatives for generating revenue, most state governments have suffered more from the slide in the oil price since mid-2014 than the FGN. Their monthly payouts from the Federation Account Allocation Committee (FAAC) have slumped, leading to the accumulation of salary and pension arrears. 

In response, the FGN has launched five domestic debt relief programmes. Yet in mid-2017 up to 20 state governments were still in arrears. Along with the slump in their monthly income, states have laboured under heavy debt burdens. 

Their external debt is captured in detail by regular DMO data releases. At end-June, the total was US$3.94bn, of which Lagos and four other states accounted for 55.2% (see chart). The external debt of the other 31 states and the Federal Capital Territory combined was just US$1.76bn. 

This debt is guaranteed by the FGN, and therefore appears in its total of US$15.05bn as at June. The other point to make is that all the states’ debt is due to multilateral and bilateral creditors, and on concessional terms. 

For the sake of clarification, we note that the reimbursements by the FGN to the states for the overpayment of external debt service to the Paris Club and London Club pre-2005 are being made in naira. The states are being compensated for historic “over-deductions” by the FAAC in their monthly payouts. In May they received a total of N244bn.   

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The onerous debt burden of the states is domestic. These obligations amounted to N3.18trn in June and are not guaranteed by the FGN, hence the latter’s relief programmes. Because they are not guaranteed, we can speculate that they were less scrutinised at the time of disbursement by the lenders (the banks). We can be sure that they attract market rates of interest. 

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