Africa’s largest economy is struggling to find its feet. Sliding oil prices threaten to derail President Muhammadu Buhari’s efforts to put Nigeria’s public finances back in order, fund planned infrastructure spending, and field much-needed social programmes. Until global crude prices rebound or he undertakes more ambitious reforms, Mr Buhari almost certainly will need to borrow just to make ends meet.
The good news for Mr Buhari is federal government debt is relatively low as a percentage of GDP, which was estimated at $488bn in 2013. In 2005, Nigeria struck a deal with Paris Club lenders to write off over half of the country’s $30bn debt. Since then, however, Nigeria’s debt profile has steadily grown. As of the end of last year, Abuja owed domestic and international creditors roughly $55bn.
The bad news facing Mr Buhari is that a disproportionate amount of government borrowing is in the form of high interest loans from domestic banks. Fiscal federalism means that federal government liabilities could balloon suddenly if Nigeria’s 36 states begin defaulting on their debts. Years of risky sub-national borrowing, lax oversight of state government finances, and dwindling state revenues could come back to haunt the Buhari government.
Most states generate minimal revenue outside of their monthly allocation of Nigeria’s anaemic oil income. They depend almost exclusively on monthly allocations of federal revenues, which have declined sharply in line with global crude oil prices. Since taking office, Mr Buhari has already bailed out 27 cash-strapped states to the tune of $2.1bn. Many states also have borrowed to meet their salary obligations, often at exorbitant interest rates as high as 25 per cent. States’ borrowing trends are risky and need to be addressed, according to a recent report by the African Development Bank. Global Credit Ratings, the African equivalent of Moody’s or Fitch, announced in May 2015 that it would place the sub-national debt sector on a negative outlook and downgrade five state government credit ratings. Of the eight states it rates, six are at or below the threshold for issuing investment-grade bonds.
Some of Nigeria’s richest states are its most indebted. They owe the most both in terms of overall dollar amounts and as a percentage of internally generated, non-federally derived revenues, or ‘IGR’ in Nigerian parlance. Oil-rich Delta State, for example, was Nigeria’s third most indebted state as of the end of 2014, according to Nigeria’s Debt Management Office.
It owed $233m dollars to its creditors, roughly five times its annual IGR. This amount is well beyond the World Bank debt burden threshold that says debt should not exceed 200 per cent of IGR.
All told, half of all states have debt to revenue ratios that are twice as high as the World Bank sustainability ratio or higher. Five geographically diverse states: Plateau, Nasarawa, Ekiti, Cross River, and war-torn Borno have debt ratios that exceed ten times annual state revenues.
Nigeria’s least indebted states, meanwhile, do not fit a particular profile. Sparsely populated agrarian Ebonyi State generates little in the way of state revenue, but also has kept its debt profile exceptionally low. Lagos State, meanwhile, which reportedly accounts for roughly 65 per cent of Nigeria’s non-oil GDP, has borrowed the most money of any state but has done so sustainably given $1.5bn in annual IGR.
To mitigate this threat, Mr Buhari should think like a consumer struggling to pay off a high interest credit card balance. He and his finance minister Kemi Adeosun could work with international financial institutions to refinance Nigeria’s expensive sub-national debt at lower interest rates over longer periods, thereby freeing up much needed cash flow.
Eleven states are already working with the federal government and domestic banks to restructure their debt, but greater savings almost certainly are possible internationally.
Mr Buhari could make debt relief contingent on state governments’ willingness to tighten management controls and increase budget transparency. Few state governments publish details of their annual budget and borrowing costs, according to BudgIt, a Nigerian civic organisation. International lenders presumably would use dollars to buy these domestic debts from Nigerian banks: good news given the country’s foreign exchange shortage.
Longer term, federal officials need to work more closely with state governors to prevent state government finances from sinking deeper into the red. Without action, states will continue to incur liabilities that could boomerang back onto the federal government at any time. If such a scenario is not sobering enough, Mr Buhari should keep in mind that runaway borrowing by state governors was one of justifications for the 1983 coup d’etat that first brought him to power.
Matthew Page
