Borrowing Straitjacket for Most States


Monday, August 23, 2021 / 10:53 AM / By FBNQuest Research / Header Image Credit: BNN

The growth in the domestic debt of state governments has slowed to almost zero, amounting to just 0.4% y/y at end-March. In contrast, aggregate lending to the private sector from all sources (and not just the deposit money banks) is growing y/y at double-digit levels. Federal agencies are containing the rise of subnational debt for reasons of best practice. They know that the repayment capacity of most states has shrunk in the past decade and that the monthly payout by the Federation Account Allocation Committee (FAAC) falls well short of states' recurrent spending in aggregate (Good Morning Nigeria, 22 July 2021). The first Buhari administration introduced controls on new borrowing and organized several debt relief initiatives including a swap of states' bank borrowings for FGN long bonds. We would like to show the burden of states with the usual ratios for comparative purposes such as debt stock/GDP and interest payments/total revenue. However, the data is patchy for all but a handful.


For almost all states, domestic borrowing declined over the 12-month period. One exception was Lagos State, for which it increased by 14.2% y/y.


The other borrowers in the chart are mostly oil producers that benefit from the 13% derivation formula applied to FAAC distributions. (It is sometimes forgotten that Lagos has joined this privileged group.) 


Lagos also tops the table for external borrowing, which is necessarily guaranteed by the FGN, with a larger 29.5% share of the total as at December 2020. The most indebted state has the means to meet its debt obligations due to its ability to bank substantial internally generated revenue on top of the formulae-driven FAAC payouts because of the concentration of manufacturing and services sector companies within its jurisdiction. We draw the same conclusion from the fact that it has been the only state able to tap the domestic bond market in the past five years (and maintain an external credit rating in the process).


Taking the external and domestic debt together from the quarterly releases by the DMO, we arrive at a debt burden for states of USD14.9bn, which represents 3.7% of 2020 GDP.


Lagos was the most indebted (USD2.65bn), followed by Kaduna and Rivers states within a range of USD700m-USD750m.


Looking ahead, the gap between the handful of states in relatively good fiscal health and the rest is set to widen.


Domestic debt of state governments, Mar 2021 (% shares)                            Total NGN4.12trn

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Sources: CBN; FBNQuest Capital Research

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