Heavy Weight of State Government Debt

Tuesday, August 11 2020 / 11:28AM / by FBNQuest Research / Header Image Credit: AARP/Ecographics

Thedomestic debt of state governments at end-March amounted to N4.11trn,equivalent to 2.9% of GDP and unchanged from three months previously. Itincreased by N840bn in 2015 alone, which saw the first of five debt reliefpackages launched by the FGN over two years. The annual rise in the burden hassince slowed: the states are now subject to greater regulatory oversight andbanks have generally lost their appetite to lend to states due to the weaknessof the oil price and its impact on the monthly distributions by the FederationAccount Allocation Committee (FAAC), on which most states depend.

The five largest debtors at end-2019 were Lagos, three oil producers andCross River. They made up 32.7% of the total, leaving the sizeable balancedivided between 31 state governments and the Federal Capital Territory.

At end-2011 the five were the same states except that Bayelsa, anotheroil producer, was briefly the leading debtor.

As with external borrowings, Lagos State is the largest domestic debtorin terms of bank borrowings and bond issuance (see below). Its accounts for2019 tell us that it is well placed to meet its obligations. We see totalrevenue of N645bn, in which internally generated revenue (N348bn) comfortablyexceeded statutory allocations from the FAAC (N230bn). Net earnings of N366bnwere translated into an overall surplus of N67bn after capital items,depreciation and public debt service (N63bn).

Domestic debt of state governments (N trn; end-year)

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Sources: Debt Management Office (DMO) FBNQuest Capital Research

This data series excludes the issuance of naira-denominated bonds, whichcurrently amount to N390bn in total. Lagos alone accounts for N330bn and is thelast state government to have come to the market (several times) since CrossRiver in May 2015. Coupon payments and principal repayments are deducted fromthe monthly distributions by the FAAC.