All of Nigeria’s sub-nationals have earned increases in their foreign debt servicing, no thanks to the eroded value of the local currency over the past several months. The development has threatening economic implications.
The recent revelation by the Debt Management Office (DMO) regarding the increase in the naira value of Nigeria’s sub-national external debt underscores the economic challenges facing the country’s 36 states and the Federal Capital Territory (FCT). The analysis of the debt profile between June and December 2023 reveals significant implications for both state governments and the broader national economy.
According to the DMO’s data, the total external debt of Nigeria’s states and the FCT surged by 23.76 per cent from N3.350 trillion to N4.146 trillion within six months. Despite a relatively modest increase of approximately $261 million in the total sub-national external debt, this spike highlights the substantial impact of currency depreciation on debt obligations.
The primary driver behind the surge in the naira value of sub-national external debt is the significant weakening of the naira against major currencies during the period under review. The exchange rate depreciated by 17.92 per cent, from N770.38/$ to N899.39/$, resulting in a substantial increase in the naira equivalent of dollar-denominated debt.
The elevated naira value of external debt poses significant challenges for state governments, particularly in terms of debt servicing. States like Lagos and Kaduna, with considerable external debt stocks of $1.24 billion and $587.07 million, respectively, are particularly vulnerable to the adverse effects of currency depreciation.
Governor Uba Sani of Kaduna State recently expressed concern over the impact of debt service obligations on the state’s finances, highlighting the diversion of resources from critical sectors due to debt servicing requirements.
A dean at Adeleke University, Professor Tayo Bello, has noted that the surge in sub-national debt reflects broader economic challenges facing Nigeria, including currency instability and fiscal vulnerabilities. He said the depreciation of the naira not only exacerbates debt servicing costs for states but also has implications for the national economy.
As highlighted by recent reports, the federal government has also experienced a significant increase in the naira value of its external debt, further straining public finances.
Also commenting, a lecturer at Auchi Polytechnic, Zakari Mohammed, noted that the escalation of sub-national debt underscores the urgent need for proactive measures to address fiscal vulnerabilities and enhance debt management practices. He said state governments must prioritise fiscal discipline, prudent borrowing, and effective debt servicing strategies to mitigate the adverse effects of currency depreciation. “Additionally, there is a need for macroeconomic policies aimed at stabilising the exchange rate and enhancing the resilience of the Nigerian economy to external shocks.
“The spike in the naira value of Nigeria’s sub-national external debt highlights the economic challenges facing states and the broader implications for the national economy. Addressing these challenges requires coordinated efforts from both federal and state governments, as well as proactive policy interventions to strengthen fiscal sustainability and mitigate the risks associated with currency depreciation. Failure to address these issues effectively could undermine economic stability and impede progress towards sustainable development goals,” Mohammed noted.
When servicing debt becomes expensive for states, it carries significant implications for both the states themselves and the broader economy.
Commenting on the implications, an economic affairs analyst, Fabian Johnson, noted that high debt servicing costs can constrain state budgets, limiting resources available for essential public services such as healthcare, education, infrastructure development, and social welfare programs.
“States may be forced to allocate a significant portion of their budget towards debt repayment, leaving limited funds for investment in critical areas of development.
“Expensive debt servicing can lead to a reduction in public investment, including infrastructure projects and capital expenditure. States may be compelled to prioritise debt repayment over investments that could drive economic growth and improve living standards for citizens, thereby hindering long-term development objectives,” said Johnson.
Also speaking, a retired lecturer of economics, Dr. Samuel Olaleye, noted that states facing high debt servicing costs may resort to additional borrowing to meet their financial obligations, thereby exacerbating their debt burden. He said this can create a vicious cycle of debt accumulation, leading to a further deterioration of fiscal health and increasing the risk of debt distress.
Olaleye also said persistent challenges in servicing debt may negatively impact a state’s creditworthiness and erode investor confidence.
“Credit rating agencies and financial markets closely monitor a state’s ability to meet its debt obligations, and failure to do so can lead to downgrades in credit ratings, higher borrowing costs, and limited access to capital markets,” he stated.
On the macroeconomic scale, the president, Independent Shareholders Association of Nigeria (ISAN), Moses Igbrude, has stated that high debt servicing costs can dampen economic growth and investment by diverting resources away from productive sectors of the economy.
“Reduced public spending and investment can lead to a slowdown in economic activity, job losses, and diminished opportunities for wealth creation and poverty reduction,” Igbrude said.
