Sub-national governments continued to grapple with a persistent reliance on borrowing to finance their budgets in 2023, as the total debt stock of the 36 states surged by 38.1%, from N7.25tn in 2022 to N10.01tn.
According to BudgIT’s 2024 State of States report released on Tuesday, the debt growth was partly driven by a N606.12bn increase in domestic debt, resulting in an average year-on-year growth rate of 11.4%. By 31st December 2023.
The total domestic debt stood at N5.86tn.
The situation was further complicated by rising foreign debt, which increased by 4.1%, from $4.43bn in 2022 to $4.61bn in 2023.
According to the report, the liberalisation of the exchange rate exacerbated the financial strain on states, significantly raising their foreign loan repayment obligations in naira terms.
Lagos State remained the most indebted in foreign currency, accounting for 26.9% of the total foreign debt, equivalent to $1.24bn.
Further analysis of the debt landscape revealed a considerable variance of N2.74tn in debt repayment obligations when comparing the exchange rate shift from N899.39 per dollar as of December 31, 2023, to the new rate of N1,492.9 as of June 2024. The devaluation exposed many states to heightened financial risk, particularly the eight states where more than 50% of the total debt is dollar-denominated.
Kaduna and Edo had the highest foreign debt-to-total debt ratios, at 86.06% and 60.54%, respectively.
The other states in this group—Ondo, Bauchi, Lagos, Enugu, Ebonyi, and Anambra—had ratios ranging from 50% to 59%.
The debt burden also varied significantly across the country, with the average sub-national debt per capita reaching N40,469 in 2023.
Twelve states exceeded this benchmark, with Lagos having the highest debt per capita at N138,034.
In addition to the existing debt stock, the states have exiting liabilities totalling N1.19tn: N408.69bn is owed in contractor arrears, N521.36bn is owed in pension and gratuity arrears, N79.64bn is owed in salary and other staff claims, N4.36bn is owed in judgement debt and other pending litigation, and other payables and liabilities amount to N182.79bn.
The report advised that to achieve debt sustainability, states need their appetite for accumulating foreign loans amidst exchange rate volatility and shrinking fiscal space to minimise their exposure to unfavourable exchange rates.
“Domestic revenue mobilisation should be strengthened to reduce borrowing needs and budget deficits.
“States should implement fiscal reforms that broaden the tax base and formalize economic activities.
“Furthermore, states should establish robust frameworks for debt transparency and accountability, ensuring that borrowed funds are directed towards high-impact projects with clear economic returns. Enhanced coordination between federal and state governments is essential for monitoring debt sustainability and providing guidance on borrowing limits to safeguard fiscal stability,” BudgIT advised.