Three Nigerian states are seeking a suspension of foreign debt repayments amid exchange rate volatility

Story highlights

• Three Nigerian states – Ekiti, Cross River and Ogun – have proposed to suspend external debt repayments due to extreme exchange rate volatility to ease the financial burden of their reduced monthly allocations from the federal account.
• Finance commissioners in these states expressed concerns about unsustainable debt service costs and the impact on their ability to finance key capital projects.
• The federal government acknowledged these challenges at a recent meeting of the Federal Account Allocation Committee (FAAC) and is considering these proposals as part of ongoing discussions in the National Economic Council (NEC) to address broader economic issues.

At least three Nigerian states, Ekiti, Cross River and Ogun, have proposed a suspension of foreign debt repayments due to severe exchange rate volatility.

This appeal is part of their efforts to mitigate the increased debt service burdens that have significantly reduced their monthly financial allocations from the Federation Account.

Details of these proposals were set forth in the minutes of the March 2024 meeting of the Federal Account Allocation Committee (FAAC). The minutes were approved at the subsequent meeting on April 19, 2024 at the headquarters of the Federal Ministry of Finance. A copy of the minutes was received and viewed by Nairametrics.

State finance commissioners are raising concerns

Ekiti State Commissioner for Finance, Akintunde Oyebode, noted that financial stress caused by rising exchange rates had increased the cost of repaying foreign debt.

He called for a detailed discussion on exchange rates and multilateral financing to address these challenges.

Oyebode also noted that significant deductions from statutory revenue for savings have drastically reduced government balances.

Similarly, Cross River State Finance Commissioner Michael Odere expressed concerns about the ability of states to fund capital projects due to reduced revenues.

He proposed a suspension of certain deductions, including those for multilateral loan repayments, particularly when distributable income is low.

Odere also suggested organizing stakeholder meetings before the FAAC to better manage financial allocations in times of budget deficits.

The Ogun State Commissioner for Finance, Dapo Okubadejo, called for the redirection of the 200 billion naira previously earmarked as savings back into the federal government account for redistribution among states.

He noted that this will help alleviate financial distress and support necessary infrastructure developments so that states can better deal with the unpredictability of exchange rates that impact multilateral financing.

The minutes of the meeting state:

“The HCF, Ekiti State, noted that due to the rising exchange rate, there were significant increases in the amounts deducted from the statutory revenue of the states for the repayment of foreign loans. He therefore pointed out that a detailed discussion on exchange rates in the context of multilateral financing is needed to address the issue. In addition, he expressed concern about the amount deducted as savings from the month’s income, noting that this had enormously reduced sub-nationals’ balances.

“The HCF, Cross River State expressed concern that states may not be able to finance major projects due to declining revenues. He recommended that, given the strained financial situation of the subnationals, some of the proposed deductions should be suspended, including the repayment of multilateral loans. He also recommended that whenever total distributable income is low, a meeting should be held with stakeholders before the FAAC to discuss ways to address the situation.

“The HCF, Ogun States on its part, suggested that the 200 billion naira set aside as savings should be returned to the Federation account for distribution to the beneficiaries. On the issue of multilateral financing, he proposed establishing a system to effectively address issues related to exchange rate volatility. The Enugu State HCF noted that if more funds were made available to states for infrastructure development, state revenue would increase.”

FG’s answer

Responding to these concerns, Finance Minister Olawale Edun, who also chaired the meeting, noted that discussions on exchange rates, interest rates and other economic challenges were ongoing at the National Economic Council (NEC).

He urged states to convey their concerns to their chief executives/governors for thorough consideration.

Edun also stressed the need for increased cooperation between monetary and financial authorities to promote national development in these difficult economic times.

What you should know

• The Debt Management Office (DMO) recently announced that the total external debt stock of the 36 states and the Federal Capital Territory (FCT) reached $4.61 billion as of December 31, 2023, up from $4.46 billion in Previous year. Within a year, the external debt of the 36 states and the FCT increased slightly by about 3.36% or $150 million.
• Nairametrics recently reported that the Naira value of the total external debt of Nigeria’s 36 states and the Federal Capital Territory (FCT) increased by 23.76% from N3.350 trillion to N4.146 trillion between June 2023 and December 2023.
• Ekiti, Cross River and Ogun are among the ten Nigerian states with the highest external debt as of December 31, 2023.
• The external debt servicing cost N120.01 billion in 2023 from states’ allocations. This was an increase of 54% (or N42.01 billion) from the N78 billion withdrawn in 2022.
• Recently, the Kaduna State Governor, Senator Uba Sani, lamented the rising cost of servicing the state’s external debt, pointing out that he was paying back almost three times what the previous government of Malam Nasir El-Rufai borrowed. According to him, the huge debt inherited from his predecessor has resulted in significant deductions from the state’s monthly FAAC allocation, diverting resources intended for critical sectors into debt servicing.
• The increase in the naira value of external debt and subnational debt service is due to the significant weakening of the naira.
• In the six months between June 30 and December 31, 2023, the Naira depreciated by 17.92% to close at 11/$ for the year 2023 from N769.25/$ on June 30, 2023.
• Naira is currently trading between N1,300 and N1,400 and this is expected to increase the naira cost of servicing states’ external debts.