Checking states' debt overhang [Sun, The (Nigeria)]
(Sun, The (Nigeria) Via Acquire Media NewsEdge) The Fiscal Responsibility Commission (FRC), in its recently released Annual Report and Audited Accounts for 2011, listed nine states of the federation as heavy debtors. The states are: Lagos, Edo, Ekiti, Kaduna, Cross River, Ondo, Bayelsa, Ebonyi and Kwara. The debts are mostly external loans and money borrowed from banks and the capital market, but excludes debts owed to contractors. The Commission sourced its data from four main government agencies: Debt Management Office (DMO), banks, Securities and Exchange Commission (SEC) and the Office of the Accountant-General of the Federation.
Instructively, only the statutory revenues of the states were used in arriving at the debt stock, because, in the words of FRC, "the states refused to supply data on their Internally Generated Revenue (IGR)." In any case, none of the states, except Lagos, was able to generate more than eight percent of its annual revenue. This should be a wake-up call for all the states to look inwards and design strategies to increase their IGR and spend less.
The FRC audit reports show that all the "over-borrowing" states ignored provisions of the Fiscal Responsibility Act, which aim to reduce the financial recklessness of states by limiting their borrowings to 50 per cent of their annual revenue for the preceding year, as stipulated by the DMO, which is the nation's custodian of debt stock. The DMO guidelines also specify that the nation's total indebtedness should not exceed 40 percent of the Gross Domestic Product (GDP). At present, Nigeria's GDP is reported to be growing at 7.45 percent, debt stock is growing at approximately 23.75 percent, while debt service is growing at 26.81 percent.
The FRC Report states that Lagos State tops the list of heavy debtors having reportedly over-borrowed to the tune of 155.40 percent of her consolidated debt to revenue ratio, with annual statutory revenue profile of N125.48 billion against a debt profile of N193.44 billion. Next to Lagos is Ekiti State, with a debt profile of N35.98 billion against a revenue profile of N44.97 billion, a ratio of 80 percent above its borrowing limit. Kaduna, Edo, Ondo, Bayelsa, Ebonyi and Kwara States follow each other closely, with debts to revenue ratios ranging from 62.68, 61.44, 56.03, 55.12, 54.5, 51.85 and 51.75 percent, respectively. Other states that also crossed the borrowing limit, but are not as heavily indebted as the top nine, according to the FRC report, are Bauchi, Imo, Ogun and Osun States.
Although some of the states, like Lagos and Ekiti, have denied that their borrowing pattern exceeds their approved ceiling, it is worrisome that many of the heavily indebted states have little in terms of projects to justify the huge loans obtained their governors. Many of these loans are in form of bonds.
Over-borrowing by states is fraught with unpleasant socio-economic consequences. It is capable of mortgaging the future of states concerned if the trend is not checked. Ordinarily, there is nothing wrong with borrowing to execute capital-intensive projects. What is disturbing is the misuse of the loans. It has become commonplace in recent years for some states to issue bonds and take loans from the banks and the capital market with the fraudulent intent to saddle successor administrations with a debt overhang.
There is, therefore, the need to monitor the risks inherent in public debts. It is sad that in spite of guidelines by the DMO, the FRC, Central Bank and the Office of the Accountant-General of the Federation (OAGF), many states still flagrantly flout financial directives and exceed their borrowing threshold.
State governments should be reminded that the main objective of the Fiscal Responsibility Act is to ensure prudence and check reckless use of public funds. Recent statistics from DMO, which show that the share of domestic debt to total public debt has been on the rise, call for caution and sound debt management practices at both federal and state levels. Borrowing comes with a huge financial cost, which is the cost of servicing the debt over the medium to long run, with negative impact on the state governments' fiscal position.
We, therefore, urge the CBN, DMO and FRC to ensure that governments are not overexposed to the risks of huge debt portfolio. Banks should also adhere to extant laws with respect to lending to states and local governments and their agencies, in line with the Fiscal Responsibility Act, 2007 and the Debt Management Office Act, 2003.
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