States and their ballooning debts

Some 12 states have issued bonds totalling N375 billion, surpassing the total bonds issued by all states in the country in the previous 32 years. Lagos State tops the list of borrowers from the bond market, at N167.5 billion, while Delta State is second with N50 billion. Both states had earlier issued bonds in various […]

Some 12 states have issued bonds totalling N375 billion, surpassing the total bonds issued by all states in the country in the previous 32 years. Lagos State tops the list of borrowers from the bond market, at N167.5 billion, while Delta State is second with N50 billion. Both states had earlier issued bonds in various sums, while Rivers recently launched a N100 billion bond, and Bauchi and Gombe are planning to go to the market at a yet to be announced date to raise around N25 billion.
Among northern states that have borrowed from the capital market, Niger is ahead with N21 billion, followed by Gombe with N20 billion.
The trend has raised their already huge debt profiles as most states struggle to offset their foreign and domestic debts. A report published by the Debt Management Office (DMO) last month showed that the 36 states and the Federal Capital Territory (FCT) have accumulated foreign debts totalling $3.01 billion as of June 2014.
Most state governments have also taken loans and overdrafts from banks, merely to pay salaries, as they continue to complain of dwindling allocations from the monthly Federation Account, following declining oil prices in the international market. These debts have continued to increase even as banks deduct huge sums from their accounts monthly to service the loans.
How long would state governments continue the unhealthy practice of borrowing to fund their operations, most of them non-productive, instead of looking inwards and developing contingency plans to run government affairs, is an open question in the absence of an effective regulatory mechanism.
While states continue to incur massive debts, improvements in social welfare indicators have generally been minimal or have slowed since Nigeria returned to democracy over 15 years ago. Poverty reduction and job creation schemes have failed to keep pace with population growth and the health and education sectors are in shambles.
The problem is that many states find it easier to raise funds through bonds instead of focusing of the more sustainable process of identifying and exploiting internal revenue sources; their dependence on federal oil revenues over the years has made them lazy and complacent. Only a few states like Lagos are able to fund their operations from internally generated revenues (IGR).
To make matters worse, data on most states’ IGR are hard to access because the authorities are reluctant to put the information in the public domain for verification and accountability purposes.
It is equally disturbing that most of the funds borrowed are not used for the purposes some state governors say they would be put to. This probably explains why the option of partnering with the private sector has suddenly become unattractive to the second tier of government.
Another issue is that while it is cheaper to issue bonds than take bank loans and overdrafts, most debt instruments have an average tenor of about seven years. This means that second-term governors who have borrowed now will leave the debt burden for their successors, which is an unhealthy development, especially where the funds have been misappropriated.
The time has come for states to start developing contingency plans to fund their operations. There is need for the National Assembly to enact legislation to bar states from taking unsustainable foreign loans. State legislatures must also wake up to their responsibilities by discouraging governors from taking unviable loans and by questioning some of the bond issues when the proposals are made. State borrowing must be regulated because there is no probity, accountability and transparency in all facets of the transactions.  Any loan taken by the state government should include provision that it must defrayed in the lifespan of the administration concerned, not later.