The total debt of Nigeria's 36 states, alongside the Federal Capital Territory (FCT), has reached an unprecedented N11.47 trillion by June 30, 2024, as confirmed by the Debt Management Office. This figure highlights a worrying trend: state-level borrowing continues to surge despite increased federal allocations, which were boosted by higher oil prices and foreign exchange gains.
Since December 2023, state debt has grown by 14.57 percent from N10.01 trillion, with external debt taking the lead, exacerbated by the sharp depreciation of the naira. Between the end of 2023 and mid-2024, the exchange rate fell from N899.39/$1 to N1,470.19/$1, inflating external debt in naira terms by a staggering 73.46 percent, from N4.15 trillion to N7.2 trillion. This sharp rise has raised concerns over the sustainability of state debt as repayment costs in naira terms skyrocket, stretching the already thin financial fabric of many states.
Domestic borrowing, on the other hand, experienced a decline of 27.12 percent, signaling a shift toward international credit markets. This pivot is largely due to the potential for longer repayment schedules and, at times, more favorable interest rates on foreign loans, even though these come with the vulnerability of exchange rate fluctuations.
The Federation Account Allocation Committee (FAAC) disbursed N3.473 trillion to the three tiers of government in Q2 2024, marking a slight increase of 1.42 percent from the first quarter. Of this sum, 36 states received N1.337 trillion, while local governments shared N864.98 billion. However, this boost in allocation has not curbed the appetite for borrowing across the states, which are increasingly relying on debt to fund infrastructural projects and meet financial commitments.
Rivers, Taraba, and Niger States saw some of the highest jumps in debt, raising questions about fiscal prudence and debt sustainability. Rivers State, for example, recorded a 67 percent increase in debt, primarily due to new project financing, while Taraba's debt ballooned by 160 percent. These trends suggest that states are still grappling with balancing revenue from FAAC against their expenditure, leading to a debt spiral that threatens long-term economic stability.
States such as Lagos, however, buck the trend. Despite carrying the highest debt burden, Lagos managed to reduce its domestic debt by 5 percent. Similarly, Delta and Bayelsa took proactive steps to pare down their domestic liabilities, demonstrating fiscal strategies that may serve as a model for other states to follow.
While higher FAAC allocations offer some relief, experts warn that rising debt levels—especially when fueled by foreign currency loans—pose significant risks, including increased debt servicing costs and potential default. The current trajectory of borrowing, spurred by naira devaluation and unrelenting spending pressures, underscores the urgent need for states to adopt stringent fiscal discipline and explore alternative revenue streams to finance development sustainably.
As the debt-to-revenue ratios climb, it becomes imperative for Nigerian states to carefully evaluate their borrowing strategies and prioritize projects with high economic returns. The cautionary tale here is clear: without a recalibration of fiscal policies, Nigeria's states may find themselves in an untenable debt trap, burdening future generations with unsustainable debt loads.
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