KEY POINTS
- Nigerian states’ combined debt surged by 38.1% over the past year.
- Economic challenges and revenue shortfalls drive increased borrowing.
- Analysts warn that rising debt could strain state finances in the future.
Nigeria’s state governments have increased their debt by a staggering 38.1% over the last year due to rising economic challenges and low revenue collections.
According to Business Day, the cumulative debt has now become a huge burden on the states that are gradually relying on borrowing to balance their budgets and continue with crucial service delivery.
This increase in debt indicates the performance issues that states are going through across Nigeria, with experts pointing at risks in financial and economic development. Most states have been forced to borrow due to poor IGR and inadequate federal allocations leading to a sharp rise in the overall debt level.
The high revenue shortfalls have led to high borrowings.
The major causes of this rise in debt include a decrease in oil revenue, a major source of income for many states, and the general effect of economic conditions that have reduced the growth of local revenues.
With most states still struggling to balance their budgets and finance infrastructure projects and social services, borrowing has emerged as a major way of financing budget shortfalls.
Since economic recovery has been slow, states have not been able to increase IGR, but instead have relied on domestic and external loans to fund their needs.
However, as this kind of the debt proceeds, analysts say that there are problems where states are unable to fund revenue to service such contingencies in the future.
Fiscal sustainability at risk
Economists have raised the alarm on the sustainability of the increasing debt levels arguing that many states may be headed for long-term fiscal problems if debt service starts outstripping revenues.
Conventional borrowings can assist with realizing essential projects in the short run, yet high levels of indebtedness may inhibit states’ future capacities for investing into the potential growth of the economy and advancement of the society.
However, states have not relented in their search for ways to improve their solvency position or fiscal capacity. There has been progressive attempt to enhance IGR by enhancing tax measures and local revenue sources.
Nevertheless, increasing debt portfolio reveals the necessity of more efficient fiscal systems where issues related to short-term funding, and the corresponding sustainable long-term finance will be attended with more attention.
Looking for solutions as the debt keeps piling
The significant increase in state debt is an opportunity for Nigerian state governments to seek for more sustainable sources of financing.
Economic experts advise that states should increase their revenues by the development of other economic activities, promotion of investment, and undertaking of fiscal reforms. BusinessDay has reported that the state governments should be careful with borrowing and focus on projects that will generate revenues to finance debts.
However, due to these fiscal issues, there remains hope that continued economic reformation as well as shifts in focus towards revenue mobilization could save the states from relying more on debt in future.
The paper concludes that through the adoption of sustainable fiscal policies, the Nigerian states can transform the fiscal structure to sustainable one that will enhance development in the long run.
