Three states are requesting a suspension of $501 million in loan repayments

The state governments of Ekiti, Cross River and Ogun have proposed a suspension of repayment of their $501 million foreign debt due to severe exchange rate volatility.

The proposal is part of its efforts to alleviate increased debt service burdens, which state officials say has significantly impacted its ability to service existing debt.

Checks by our correspondent from the Debt Management Office revealed that the three states have received multilateral and bilateral loans, making them among the top 10 states with the highest foreign debt stock in December 2023.

Cross Rivers has the highest amount at $211.13 million, followed by Ogun at $168.8 million and Ekiti at $121.1 million.

Details of these proposals were highlighted in the minutes of the March 2024 meeting of the Federal Account Allocation Committee.

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

He said the cost of servicing foreign debt has drastically reduced its share in the Federation Account and advocated 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 had drastically reduced government balances.

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

Similarly, Cross River State Finance Commissioner Michael Odere expressed concerns about the state’s ability to fund capital projects due to reduced revenue.

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.

It added: “The HCF, Cross River State expressed concern that states may not be able to finance capital projects due to declining revenues. He noted 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 scheduled before the FAAC with stakeholders 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.”

He noted that this would help alleviate financial distress and support necessary infrastructure developments, allowing states to better deal with the unpredictability of exchange rates that impact multilateral financing.

Ondo State Commissioner for Finance, Omowumi Isaac, in his comment, also lamented the level of deductions from the account for the month, which resulted in low income distributable to the association, suggesting that some of the deductions should be reversed.

When contacted, Finance Minister Olawale Edun, who is also the chairman of the meeting, responded to these concerns, noting that discussions on exchange rates, interest rates and other economic challenges were ongoing at the National Economic Council.

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.

The DMO recently announced that the total external debt stock of the 36 states and the Federal Capital Territory reached $4.61 billion as of December 31, 2023, up from $4.46 billion a year ago. Within a year, the external debt of the 36 states and the FCT increased slightly by about 3.36 percent or $150 million.

The external debt servicing cost N120.01 billion from states’ allocation in 2023 and N30 billion between January and February 2024. This was an increase of 54 percent (or N42.01 billion) from the N78 billion , which were withdrawn in 2022.