In the wake of the Central Bank of Nigeria’s (CBN) decision to float the naira, the 36 states and the Federal Capital Territory (FCT) are grappling with the possibility of an over 40 percent surge in their external debt burden. The recent change in foreign exchange policy by the CBN has led to a significant increase in the value of the naira, thereby impacting the states’ obligations denominated in foreign currency.
According to data from the Debt Management Office, as of December 2022, the total external debt stock of the states amounted to $4.46 billion (equivalent to N2.09 trillion at the exchange rate of N471/dollar). However, following the implementation of the new exchange rate regime, the debt stock, while maintaining its dollar value, surged to N2.96 trillion at an exchange rate of N663.04/dollar by Friday.
The CBN’s directive on June 14, 2023, to remove the rate cap on the naira at the Investors and Exporters’ Window has caused an immediate decline in the value of the local currency. The exchange rate at the Investors & Exporters FX window dropped from 471/$ to 664.04/$. Since then, the naira has experienced fluctuation in value against major global currencies.
Economists and analysts hold differing opinions regarding the future movement of the naira at the Investors & Exporters’ window. The prevailing exchange rate, however, has resulted in a substantial increase in the external debts of several states. For example, states like Lagos, Kaduna, Edo, Cross River, and Bauchi have witnessed their debt burdens grow significantly in naira terms.
Lagos, with an external debt of $1.25 billion, saw its debt rise from N588.78 billion to N828.84 billion. Similarly, Kaduna’s debt increased from N270.23 billion to N380.42 billion, Edo’s debt from N123 billion to N173.16 billion, Cross River’s debt from N98.69 billion to N138.92 billion, and Bauchi’s debt from N78.08 billion to N109.92 billion.
Other states, such as Abia, Adamawa, Akwa Ibom, Anambra, Bayelsa, Benue, Borno, Delta, Ebonyi, Ekiti, Enugu, Gombe, Imo, Jigawa, Kano, Katsina, Kebbi, Kogi, Kwara, Nassarawa, Niger, Ogun, Ondo, Osun, Oyo, Plateau, and Rivers, have also experienced a similar surge in their debt burdens.
While it is still early to predict the long-term impact, many analysts expect the naira to stabilize around N600/dollar. JP Morgan predicts an appreciation of the naira to N600/dollar in the coming months after an initial overshoot towards the parallel market rate.
The unification of the naira exchange rate is anticipated to further escalate the overall debt burden on states, particularly those already grappling with revenue shortages. States burdened with salary backlogs, such as Abia, Benue, Plateau, Taraba, Zamfara, Cross River, and Rivers, are likely to be more affected.
Nevertheless, the increase in debt burden might be mitigated by an increase in revenue allocation from the Federal Government, as most states heavily rely on the federal funds. Despite generating N5.30 trillion internally from 2016 to 2020, the states received a substantial sum of N10.19 trillion from the Federation Accounts Allocation Committee during the same period.
JP Morgan highlights the silver lining, stating that a weaker exchange rate would result in higher naira revenues for the government from oil and gas exports.
As the situation unfolds, the Nigerian states face the challenge of managing their escalating debt burdens while seeking avenues for economic growth and fiscal stability in these uncertain times.
