Modest Fiscal Relief for State Governments as FG Delays Debt Service Costs Deductions

Proshare

Tuesday, April 26, 2016 9:12AM/ FBNQuest Research

The federal finance minister, Kemi Adeosun, announced on Thursday that the Federation Account Allocation Committee (FAAC) would not be deducting debt service costs from its payout to state governments in its distribution of March revenues.

She noted that the total payout had fallen as low as N299bn. Adeosun added that she had secured approval for one month in the first instance, and that the move amounted to a deferral rather than a bailout. The step is designed to allow state governments to meet their salary obligations.

It follows a more substantial set of measures approved by the president in July 2015 to ease the fiscal pressures on the states. The largest was the restructuring of states’ banks borrowings totaling N575bn into FGN long bonds (Jul ‘34s). Additionally, the CBN was authorised to provide long-term credits at single-interest rates of up to N300bn in total to selected states.

The debt service costs (or irrevocable standing payment orders) are deducted pre-distribution as a condition of the FGN’s go-ahead for states’ primary issuance of naira bonds and for the restructuring (see above).

In 2014 the states derived in aggregate more than 65% of all their revenues from the FAAC in various forms.



Whether one month’s deferral solves the problem is highly debatable. Many states have bloated salary bills racked up in the belief that FAAC payouts would continue to cover them. Before the slide in the oil price, the distributions regularly exceeded N700bn per month.

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