Nigerian sub-nationals battle for survival as debt portfolio rises

• Lagos, Rivers only viable states in 2023

Bamidele Famoofo

There is a huge gap in financing infrastructure in Africa’s fourth-largest economy as sub-nationals (state governments) remain incapable of generating enough revenue to finance projects that will trigger growth and development.

Only a few states in the federation according to a report released by BudgIT, a civic organization based in Lagos, are capable of financing their expenditures without a recourse to borrowing.

The 2024 edition of the State of States report, released last week, showed that only Lagos and Rivers States are capable of fully financing their expenditures.
These leading states, one, Nigeria’s commercial capital city and the other, the oil capital of the nation, were able to generate more revenue than they needed to take care of their expenses locally, without scrambling while the others had to depend on FAAC revenue, aids and grants.

According to BudgIT, “Rivers and Lagos were the only two states that generated more than enough Internally Generated Revenue (IGR) to cover their operating expenses, with IGR to operating expense ratios of 121.26 per cent and 118.39 per cent, respectively.

“Several other states, including Ogun, Anambra, Cross River, Kwara, Kaduna, and Edo, managed to generate IGR sufficient to cover at least 50 per cent of their operating costs, with the remainder relying on federal transfers.

In contrast, states such as Akwa Ibom, Imo, Taraba, Yobe, Bayelsa, and Jigawa required over five times their IGR to meet operating expenses, highlighting significant dependence on FAAC revenues and aid and grants.

BudgIT’s Fiscal Performance table saw a reshuffling of the top positions, with Cross River joining the top five while Rivers State maintained its number one spot. Kebbi State achieved the most remarkable improvement, jumping 12 places from 28th to 16th. Conversely, Jigawa State experienced the steepest decline, dropping 16 spots to land at 36th on the fiscal performance ranking.

Of note is that all 36 states managed to raise enough revenue—comprising IGR, federal allocations, aid, and grants—to fully cover their recurrent expenditures. This indicates that no state needed to resort to borrowing to fund any portion of its recurrent spending.

Rivers State stood out for prioritizing capital expenditure, dedicating 73 per cent of its total spending to capital projects, the highest among all states.
Several others, including Kwara, Kebbi, Gombe, Ebonyi, Anambra, and Niger, allocated between 50 percent and 59 per cent of their expenditures to capital investments.

However, most 29 states focused more on recurrent spending than capital projects. New entrants to the bottom five positions on the overall fiscal performance ranking were Jigawa and Katsina, further illustrating some states’ challenges in managing their finances effectively.
Revenue
In the 2023 fiscal year, the combined revenue of all 36 states in Nigeria increased significantly by 31.2 percent from N6.6 trillion in 2022 to N8.66 trillion. This growth rate exceeded the previous year’s increase of 28.95 per cent, indicating a notable improvement in fiscal performance. 

Of the total revenue generated in 2023, Lagos State contributed N1.24trillion, representing 14.32 per cent of the cumulative revenue of the 36 States.

Gross FAAC, which grew by 33.19 per cent from N4.05 trillion in 2022 to N5.4 trillion in 2023, contributed to 65 percent of the year-on-year growth of the combined revenue of the 36 states. This increase is indicative of the additional revenue accrued to states, albeit moderate, due to the discontinuance of the petroleum subsidy.

32 States relied on FAAC receipts for at least 55 per cent of their total revenue, while 14 States relied on FAAC receipts for at least 70 per cent of their total revenue. Furthermore, transfers to states from the federation account comprised at least 62 per cent of the recurrent revenue of 34 states, except Lagos and Ogun, while 21 States relied on federal transfers for at least 80 per cent of their recurrent revenue.

The picture painted above buttresses the over-reliance of the state governments on federally
distributable revenue and accentuates the vulnerability of the state governments to crude oil-induced shocks and other external shocks. The domestic resource mobilisation capacity of the state governments seemed to improve in 2023, as the 36 states’ Internally Generated Revenue (IGR) grew by 20.33 percent to N2.19 trillion from the N1.82 trillion garnered in 2022. 

However, it was mixed fortunes for the states as the growth was unequal across the board: 6 States grew their IGR by more than 50 per cent, with Zamfara recording the highest growth of 240.22 per cent, while 7 States recorded negative IGR growth, with Jigawa recording the worst decline among the 36 States.

Cumulatively, the IGR of the 36 States accounted for just 25.27 per cent of the total revenue accrued to the states.

“The fiscal viability and long-term sustainability of the states are largely dependent on their capacity to mobilise revenues internally—leveraging their natural resource endowments, technology, public-private partnerships, human capital, and consequence management—adequate to finance critical infrastructure, invest in human capital development and social protection, pay the new minimum wage and its consequential adjustments, and amend the broken social contract.

“More specifically, the states would need to digitise revenue collection, eliminate cash-based
transactions, deploy tax intelligence to enumerate tax liabilities of entities— particularly high net-worth individuals—and enforce compliance, harmonise its different taxes, levies and fees, fully operationalise its treasury single account, and improve the ease of doing business, BudgIT explained.

Expenditure 

In 2023, the total expenditure across all 36 states reached N9.78trillion, marking a 21.19 per cent increase from the previous year’s N8.07 trillion.

Lagos State led the spending, disbursing over N1.49tn, which accounted for 15.23 per cent of the overall subnational expenditure. The year saw different growth rates across spending categories, with personnel costs rising by an average of 12.9 per cent, overhead costs by 26.75 percent, and capital expenditure seeing the most significant increase at 37.30 per cent. Personnel cost rose to N1.99 trillion from N1.75 trillion in 2022, while overhead costs climbed to N1.52 trillion from N1.24 trillion, and capital expenditure increased to N4.04 trillion, up from N3.47 trillion the previous year.

 The aggregate operating expenses of the states, which formed 47.36 per cent of the aggregate expenditure, increased by 21.17 percent from N3.8 trillion in 2022 to N4.64 trillion in 2023.

Additionally, N1.25 trillion, representing 12.8 percent of the cumulative spending of the states, was used to service debts. Interestingly, N287.56 billion, not captured by states as part of their expenditure for the 2023 fiscal year, was utilised to offset contractor arrears, pension and gratuity arrears, and other outstanding liabilities.

According to the report, most states also failed to meet the Abuja Declaration target of dedicating at least 15 percent of their annual budget to health, signalling a lack of emphasis on the sector. 

On a per capita basis, capital expenditure varied significantly across states; 24 states fell below the national average of N16,916, while only Lagos, Bayelsa, and Rivers managed to exceed the N30,000 per capita mark. These disparities highlight ongoing challenges in addressing the country’s huge infrastructure gaps and human capital deficiencies.

A potential strain on the fiscal position of many states in the 2024 fiscal year is the full implementation of the new minimum wage and the consequential adjustments across the board. States would need to create fiscal space to implement the new minimum wage by sanitising and rationalising its workforce to maximise productivity, cutting down the cost of governance and non-essential expenditure, strengthening its supreme audit institution to ensure value for money, enhancing the participation of civil society and citizens groups in the budget process, reforming its procurement regime to ensure it aligns with the Open Contracting Data Standards and implement the recommendations cited in the revenue section above.

Subnational Debt

Subnational 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 per cent, from N7.25 trillion in 2022 to N10.01 trillion. This growth was partly driven by an N606.12 billion increase in domestic debt, resulting in an average year-on-year growth rate of 11.4 per cent. By 31st December 2023, the total domestic debt stood at N5.86 trillion.

The situation was further complicated by rising foreign debt, which increased by 4.1 per cent, from $4.43billion in 2022 to $4.61billion in 2023. 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 per cent of the total foreign debt, equivalent to $1.24billion.

Further analysis of the debt landscape revealed a considerable variance of N2.74trillion 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 per cent of the total debt is dollar-denominated. 

Kaduna and Edo had the highest foreign debt-to-total debt ratios, at 86.06 per cent
and 60.54 per cent, respectively. The other states in this group—Ondo, Bauchi, Lagos, Enugu, Ebonyi, and Anambra—had ratios ranging from 50 per cent to 59 per cent.

The debt burden also varied significantly across the country, with the average subnational 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 existing liabilities totalling N1.19 trillion: N408.69 billion is owed in contractor arrears, N521.36 billion is owed in pension and gratuity arrears, N79.64 billion is owed in salary and other staff claims, N4.36 billion is owed in judgement debt and other pending litigation, and other payables and liabilities amount to N182.79 billion.

“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 mobilization 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.