The ongoing foreign exchange (FX) crunch is heightening the financial challenges faced by Nigeria’s state governments, potentially leading to a debt crisis. Many states are already grappling with low internally generated revenues (IGR) and high debt servicing costs, which have been further exacerbated by the depreciation of the naira.
BusinessDay’s analysis of the states’ debt profiles, as provided by the Debt Management Office (DMO), reveals that as of December 2023, the total domestic debt of the 36 states and the Federal Capital Territory (FCT) stood at N5.86 trillion, while their foreign debt amounted to $4.61 billion. However, by June 2024, the total domestic debt rose to N4.267 trillion, a decline from previous figures, while foreign debt surged to $4.89 billion due to the naira’s depreciation.
Experts are raising alarms about the mounting pressure on state finances, particularly due to the escalation of foreign debt in naira terms. Muda Yusuf, CEO of the Centre for Promotion of Private Enterprise (CPPE), highlighted that many states that initially took foreign loans when the exchange rate was between N200 and N300 to the dollar are now facing enormous challenges servicing those loans with the naira now at N1,600 to the dollar.
Yusuf also pointed to the poor revenue generation capacities of many states, with a significant portion of their limited resources now allocated to servicing debts rather than driving development. This trend is limiting the states’ ability to improve infrastructure and social services, critical to economic growth.
According to the National Bureau of Statistics, Nigeria’s 36 states generated a total IGR of N3.53 trillion in 2023, alongside N5.4 trillion from the Federation Account Allocation Committee (FAAC), bringing total revenue to N8.9 trillion. However, the reliance on federal allocations remains a primary revenue source, while state-level revenue generation remains weak.
Experts such as Iniobong Usen, Head of Research and Policy Advisory at BudgIT, stress the importance of curbing the reliance on foreign loans and improving internal revenue mobilization. Usen advocates for states to implement robust debt management frameworks that ensure borrowed funds are invested in high-impact projects with measurable economic returns.
Ishaq Ibrahim, an economist based in Abuja, also warned that the current economic climate, marked by high foreign exchange rates and a shrinking fiscal space, has significantly worsened the financial outlook for state governments. With revenue levels at historic lows, the pressure on states to meet their debt obligations while providing essential services is becoming unsustainable.
As the situation continues to unfold, it remains crucial for state governments to address the dual challenges of foreign debt escalation and poor internal revenue generation to avoid a deepening fiscal crisis.