The State governments in Nigeria are facing an escalating debt crisis exacerbated by a foreign exchange crunch, low internally generated revenue (IGR), and rising debt servicing costs.
Analysis based on data from the Debt Management Office (DMO) reveals that as of December 2023, the combined domestic debt of the 36 states and the Federal Capital Territory (FCT) stood at ₦5.86 trillion, while their foreign debt totaled $4.61 billion. By June 2024, domestic debt had declined to ₦4.267 trillion, but foreign debt increased to $4.89 billion.
The sharp depreciation of the naira has significantly inflated the cost of servicing foreign debt, straining state finances.
“A state that borrowed in foreign currency when the exchange rate was ₦200 or ₦300 to a dollar now faces repayment at around ₦1,600 per dollar, this puts immense pressure on state resources that could have been used for development.” ,” Muda Yusuf, chief Executive officer, Centre for Promotion of Private Enterprise (CPPE), explained.
With most states heavily reliant on allocations from the Federation Account Allocation Committee (FAAC), weak IGR continues to undermine their fiscal health. In 2023, the total IGR across the 36 states was ₦3.53 trillion, compared to FAAC allocations of ₦5.4 trillion, according to the National Bureau of Statistics.
“Many states lack strong revenue bases and are forced to divert substantial funds to service debts,” Yusuf added.
Iniobong Usen, head of research and policy advisory at BudgIT, emphasised the need for states to reduce their dependence on foreign loans, given the volatility of exchange rates and the shrinking fiscal space.
“To achieve sustainability, states must establish transparent frameworks for borrowing and ensure loans are allocated to high-impact projects with measurable economic returns,” Usen said.
He also underscored the importance of mobilising internal revenues to finance critical infrastructure and meet social obligations, including the new minimum wage.
Economist Ishaq Ibrahim warned of dire consequences if the situation persists. “High forex rates and low revenues are creating a perfect storm, leaving state governments struggling to manage their debt obligations,” he said.
The fiscal future of Nigerian states hinges on their ability to diversify revenue sources, limit exposure to foreign exchange risks, and implement robust financial management practices. Without decisive action, many states risk further economic strain, jeopardising essential services and development initiatives.
