Nigeria’s 36 states witnessed a concerning surge in debt, underscoring their deepening reliance on borrowing to support budgets amidst rising fiscal pressures.
According to BudgIT’s 2024 “State of States” report, published on Tuesday, there is a dramatic 38.1% increase in the cumulative debt stock of sub-national governments, with total debt soaring from N7.25 trillion in 2022 to N10.01 trillion by the end of 2023.
The report identifies multiple drivers behind this increase, including a substantial N606.12 billion rise in domestic debt, pushing the domestic debt stock to N5.86 trillion—a trend reflecting an 11.4% year-on-year growth rate.
Beyond domestic obligations, foreign debt continued to grow, escalating by 4.1% from $4.43 billion in 2022 to $4.61 billion in 2023. According to BudgIT, the recent liberalisation of the exchange rate has exacerbated the financial burden on states.
“With the exchange rate volatility, foreign loan repayments have become significantly more expensive for states, tightening their already limited fiscal space,” the report noted.
Lagos State stood out as the most heavily indebted to foreign creditors, holding 26.9% of the country’s total foreign debt—equivalent to $1.24 billion.
Highlighting the disparity among states, the report found that several states have high foreign debt-to-total debt ratios, exposing them to added financial risk.
For example, Kaduna and Edo ranked the highest in this category, with foreign debt comprising 86.06% and 60.54% of their total debts, respectively.
Six other states—Ondo, Bauchi, Lagos, Enugu, Ebonyi, and Anambra—have ratios ranging from 50% to 59%.
The financial impact of exchange rate shifts was stark, with a variance of N2.74 trillion in debt repayment obligations as the exchange rate changed from N899.39 per dollar on December 31, 2023, to N1,492.9 per dollar in June 2024.
BudgIT warned that such volatility leaves states facing “significant exposure to foreign currency risk.”
Per capita debt also underscored the growing burden on states. With an average sub-national debt per capita reaching N40,469 in 2023, some states significantly exceeded this benchmark. Lagos, for instance, has a per capita debt of N138,034, far above the national average, reflecting the state’s larger-than-average debt load.
In addition to debt obligations, states are also grappling with other significant liabilities.
Across the board, outstanding liabilities reached N1.19 trillion, spanning contractor arrears (N408.69 billion), pension and gratuity arrears (N521.36 billion), salary and staff claims (N79.64 billion), judgement debt (N4.36 billion), and additional payables totaling N182.79 billion.
BudgIT’s report advised State governments to exercise caution in taking on foreign loans, especially amid fluctuating exchange rates.
“It is essential for states to consider the implications of foreign-denominated debt and the impact of exchange rate risks,” the report stated. “Domestic revenue mobilisation should be strengthened to reduce borrowing needs and budget deficits.”
The report further recommended fiscal reforms to enhance revenue generation at the state level.
“States should work toward broadening the tax base and formalising economic activities to ensure a steady income flow that can help reduce reliance on external borrowing,” BudgIT noted, urging States to develop frameworks that promote transparency and accountability in debt management.
“A structured approach to debt transparency will ensure borrowed funds are directed towards high-impact projects with measurable economic benefits,” the report emphasized.
BudgIT concluded that enhanced federal-state coordination is critical to sustaining debt and managing fiscal stability.
“To achieve fiscal resilience, it’s vital for federal and state governments to collaborate on setting borrowing limits and monitoring debt sustainability, thus protecting Nigeria’s financial health at both levels,” BudgIT recommended.
