With Proposed Borrowing, States’ External Loans to Increase by 40%

10 states proposed loans, 7 approved, 3 awaiting approval Current annual debt service ratio about 2.7% Fresh loans at concessionary rates

Barring any last minute change on approval of new borrowing, the total external loans contracted by the 36 states and the Federal Capital Territory are estimated to increase by 39.65 per cent, THISDAY can report.

As it stands, seven states have secured approval to take external loans of $1.070 billion while three are awaiting approval to borrow $492.4 million to add to the existing loans.

The seven states that had been given the nod by the federal government are Abia ($200 million), Ebonyi ($70 million), Enugu ($100 million), Kano ($100million), Ogun ($350 million), Ondo ($200 million) and Plateau ($50 million). The states that are still waiting for the go-ahead are Jigawa ($32.4 million), Kaduna ($350 million) and Katsina ($110 million).

The new borrowing propos-

als (approved and yet-to-be approved) will bring the total external loans by all the 36 states to an estimated $5.502 billion from the current level of $3.940 billion published by the Debt Management Office (DMO), representing a significant increase of 39.65 per cent.

A major proportion of the current external loans- that is, $3.727 billion-of the states was contracted from multilateral institutions while the rest ($213.245 million) were bilateral loans, the DMO debt data revealed.

A cursory look at the debt deductions from the federal allocations to the states, published by the ministry of finance, revealed that for July allocations shared in August, the states serviced their debts with N2.674 billion (about $8.05 million). When annualised, the implication is that, the states are servicing their debt with about $105 million yearly, translating to a debt service ratio of about 2.7 per cent.

When THISDAY confronted the government with danger in the increasing level of debts contracted by the states, which would be bequeathed to administrations coming after them, a ministry of finance official argued that the new and proposed loans were gotten at concessionary rates. According to the source, most of the loans are World Bank’s International Development Association (IDA) credits.

In his view, Director, Union Capital, Egie Akpata, believed, the states were following the lead of the FGN to lower their cost of borrowing by going abroad to secure USD debt at concessionary rates.

Noting that, “Analysis of Debt Management Office and ministry of finance data shows that outstanding state foreign debt of $3.7billion is being serviced for less than 3 per cent per annum, principal repayment inclusive,” Akpata said, “Clearly, such low rates and amortization periods of up to 30 years are not available locally.”

He, however, added that, “with some states increasing their foreign borrowing by 200 per cent at once, there is a risk that they could run into trouble servicing these debts in the next 5 to 10 years when the naira would most likely have suffered further devaluation.”

“The current administrations would be out of office by then so won't have to deal with such future problems, “he argued.

Egie, who reasoned that the “States looking for foreign debt were making a rational decision given the price and available tenor of local debt,” suggested that, “The local debt providers, particularly the capital market would need to improve their product offerings in order to compete with foreign debt.”

“The local macroeconomic environment makes it difficult to provide local debt at low single digits. However, if the local market could provide timely debt with tenors of over 20 years, principal moratorium of at least 5 years and interest rates in low double digits, Naira debt might be able to compete with these foreign loans,” he submitted.