State governments face historic liquidity crises

State governments face historic liquidity crises

The Guardian

State governments are in dire strait as make-up funding sources dry up amid tumbling earnings, crippling their ability to repay existing loans and meet essential obligations.

While state governments mouth disdain for mounting debts and declining financial capacity, the cost of governance has continued to rise across different states with only a handful managing to pay the N30,000 minimum wage.

Amid growing liquidity crisis, findings have suggested that many state governors are queuing for commercial loans to offset “spending plans and schedules” that cannot wait. This is raising dust in the financial circle, as it would increase the already high banks’ exposure to governments.“The states are broke, and there is not much on the table to shore up their finances in the next one to two years. This should worry any prospective lender. We only hope the government will not expose the banks to financial risks. Unfortunately, some of the bank chiefs do not know how to say no to the states’ request because of their subtle blackmail,” a source who is privy to ongoing negotiation for commercial loans told The Guardian.

At the close of last year, data obtained from the Debt Management Office (DMO) revealed that the Federal Government owes N10.8 trillion as foreign debt and N10 trillion in domestic debt, while the states and FCT owe N1.8 trillion as foreign debt and N4.1 trillion as domestic debt. In same period, the states’ debts ballooned to N6 trillion, whereas the total revenue (from FAAC and IGRs) was N3.6 trillion. That puts the debt to IGRs of the states at 460 per cent just as debt to total revenue is 170 per cent.

 

Lagos tops the list of the Top 10 states by external debt (2020) with 29 per cent, followed by Kaduna, Edo, Cross Rivers, Gombe, Bauchi, Enugu, Adamawa, Anambra and Osun.

The state governments rely on IGRs and the Federation Accounts Allocation Committee (FAAC) for funding. The shortfall is bridged with loans sourced from both external and domestic sources.While government financial obligations have increased remarkably, IGRs and FAAC have rather nosedived as COVID-19 and other structural challenges have taken their toll on economic activities.

In the previous year, IGRs of states declined, albeit moderately, from N1.33 trillion to N1.3 trillion. Yet, the contribution of revenues from ministries, departments and agencies (MDAs) was less than 20 per cent of the total sum, while taxation took a chunk of the returns.

This has forced states to revert to the debt market for immediate lifeline, a culture which Dr. Adi Bongo, an economist at the Lagos Business School, describes as postponing the evil days.

Traditionally, only Lagos and Ogun states meet 50 per cent of their revenue from IGRs while some states get as much as 80 per cent of their revenues from the federation accounts. Last year, for instance, IGRs amounted to only 36 per cent of the N3.6 trillion total revenues accrued to states for spending.

Now the future of FAAC revenue appears blink as the Nigerian National Petroleum Corporation (NNPC) last week dropped a bombshell, saying May FAAC may be zero in a letter supposedly addressed to the Accountant General of the Federation.

The NNPC alarm came a few weeks after the Edo State Governor, Godwin Obaseki, told the country that between N50 and N60 billion was printed in March to share among the federating units.

The disclosure by the NNPC will further strain the fiscal position of state governments, economists have said. Already, there are growing anxiety at different state houses over debt instruments due for liquidation in the short-to-medium-term.

A source from a Niger Delta state said much of the debts are short-term facilities secured to fund the important social-impact programmes.

 

While states revenues slide, the Central Bank of Nigeria (CBN) is pulling the rug on its budget support programme. At the weekend, a source close to the top management of the regulator told The Guardian, the apex bank was no longer willing “to give any form of assistance to the states in the form of a bailout.”

Another source informed that the Obaseki exposition, which was an indirect indictment on the CBN, may have also triggered a cold war between the apex bank and the state governors, which may have closed the budget support window.

The Guardian sought a comment from CBN’s Acting Director, Corporate Communications, Mr. Osita Nwanisobi, on whether the monetary authority has formally communicated with state governors on the payment of the previous budget support facilities and if it was in a position to grant fresh applications.

Read the full story in The Guardian

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