The Fiscal Responsibility Commission (FRC) stirred the hornet’s nest when it came out with a verdict recently that nine states of the federation are wallowing in debts and since then, arguments and counter-arguments have flowed to authenticate or disavow the report, Gbola Subair captures the positions of experts and reports.

THE Fiscal Responsibility Commission (FRC) woke up from its deep slumber when it recently released a shocking report that nine states in Nigeria are currently carrying excruciating burden of debt running into billions of naira.

The affected states, according to the commission’s 2011 Yearly Report and Audited Accounts, are Lagos, Ekiti, Kaduna, Cross River, Edo, Ondo, Bayelsa, Ebonyi, and Kwara.

In the report, the FRC said nine states over-borrowed in 2011, while only five actually embraced the Fiscal Responsibility Act (FRA).

While the commission gave a clean bill of health to the Federal Government in terms of maintaining financial discipline, the FRC came heavily on states, warning that unless something drastic was done about states’ reckless expenditure, efforts at the federal level to instill financial discipline would not record any positive impact.

According to the FRC report, as of the end of 2011, nine states over-borrowed their limits, exceeding the FRC 50 per cent to ratio of revenue borrowing limit, thus, suggesting that the financial health of the nine states is in dire straits.

In indicting the nine states, the commission said in the report that it drew its data from the Debt Management Office (DMO), banks, Securities and Exchange Commission (SEC) and the Office of the Accountant-General of the Federation.

Top on the list of over-borrowed states, according to the yearly report, is Lagos, which it said had borrowed 155.40 per cent of its consolidated debt to revenue ratio. Next to Lagos is Ekiti, which it said contracted 80 per cent borrowing and is followed by Kaduna State with a debt to revenue ratio of 62.68 per cent. Cross River State follows closely with a debt to revenue ratio of 61.44 per cent.

Also listed by the FRC as states under the weight of indebtedness are Edo, Ondo, Bayelsa, Ebonyi and Kwara.

The commission said; “nine states exceeded the loan limit of 50 per cent, while four others exceeded the states’ average debt of 36 per cent.”

It was also stated that “27 of the states and FCT fell below states’ average debt of 36.36 per cent.”

For Lagos State, the commission said debt to revenue ratio stood at 155.4 per cent, while the yearly statutory revenue stood at N125.48 billion and the debt profile of N193.44 billion.

Trailing Lagos is Ekiti, with a revenue profile of N44.97 billion and a debt profile of N35.98 billion to make the state’s ratio stood at 80 per cent.

Kaduna had a revenue profile of N63.94 billion, a debt profile of N40.08 billion and a debt to revenue ratio of 62.68 per cent.

For Cross River State, the ratio stood at 61.44 per cent on revenue of N56.92 billion and a debt of N34.97 billion. The ratios for Edo, Ondo, Bayelsa, Ebonyi and Kwara states stood at 56.03 per cent, 55.12 per cent, 54.5 per cent, 51.85 per cent and 51.75 per cent respectively.

The commission based its report on data from those states› statutory revenue as a result of their inabilities to supply data on their Internally Generated Revenue (IGR). It, however, said the non-inclusion of IGR was inconsequential as IGR was not more than eight per cent of those states’ total expenditure, except Lagos.

Apart from non-inclusion of IGR in computing these states’ debt data, the commission also observed that non-inclusion of their outstanding debt to contractors and contingent liabilities was more than offset the omission of the IGR.

Computing the ratio, the commission said the Federal Government owed 111.63 per cent of its statutory revenue, while its debt stock was about 14.5 per cent in terms of debt to GDP ratio.

Before the FRC came out with the report, there had been series of insinuations that the country might be returning to the era of high debt overhang, due to the reckless nature of handling finances by these state governments.

In a proactive action to check the alleged recklessness by states, the Central Bank of Nigeria (CBN), following the DMO’s report on 31 January, warned money deposit banks in the country against continued granting of credit to the states, local governments and their agencies, because of the risk implications.  

Specifically, the apex bank raised the risk rating from 100 to 200 because of the frightening exposure of banks to states.

The DMO, in its report, said banks› exposure to states as of the end June 2012 had grown from N346.968 billion in December 2011 to N395.741 billion, representing the highest percentage of 33.37 per cent of the entire debt stock. This was closely followed by contractors› liabilities of 32.31 per cent at N383.169 billion.

The report has elicited series of uproars, particularly when only five states subscribed to the FRA. The FRC, as a body, also expressed worries that state governments were shunning their responsibility to domicile or sign up to the FRA, an Act meant to check their financial recklessness.

The commissioner in charge of policy and standards, representing the South-South geopolitical region in the commission, Dr. Sylvanus Mordi, said only five states had so far signed for the FRA.

Mordi said the commission was worried because the current FRA did not make it mandatory for states to sign for the act nor prescribed punishment and fines for violators. It also revealed that the commission was working on an amendment to make it mandatory and prescribe stiffer punishment for violators.

Mordi said because of the strong fiscal federalism provisions of the 1999 Constitution, debts, borrowing and deficit management were on the exclusive legislative list and the FRA could only apply to a state, if it decided to adopt and domesticate it as its own law.

However, he said that the provision of the FRA 2007 on debts, deficit control and borrowing applied to the three tiers of government and as a result, provided a veritable mechanism for managing the economy.

“There are challenges facing the FRA 2007. Although the Act provides for offences, it does not stipulate the matching punishments. It denies the commission the power to prosecute or punish the offenders under the Act. By implication, the FRC can only name and shame the offenders. This amounts to mere reputational punishment as it does not deter people from contravening the provisions of the Act with impunity,” Mordi further stated.

Apart from the fact that the states are not subscribing to the FRA, they have also come out vehemently to condemn the FRC and “its satanic report.”

At a news conference jointly addressed by the Ekiti State Commissioner for Finance and Economic Development, Dapo Kolawole, and the chairman of the state FRC, Bayo Aina, the state maintained that the report published by the FRC was not only misleading, but also incorrect and not up-to-date.  

Kolawole said: “The information is false and the data is wrong. Ekiti is one of the most efficient states in the country. In terms of financial management, we are very efficient and prudent. It is embarrassing for somebody sitting somewhere in Abuja to tell me that Ekiti is one of the states that over-borrowed without a crosscheck. What is the basis, statistics and how much have we borrowed compared with the state GDP?

“The DMO in Abuja can qualify to talk about the debt profile of Ekiti State and we are the first to set up state DMO. We understand what it takes to borrow. If somebody from the Fiscal Responsibility Commission is alleging that we have a huge debt profile, where did they get the information from? I challenge them to publish their data.

“I make bold to say that Ekiti is one of the least borrowing states in the country. We have tied every borrowing specifically to regenerative assets that everybody can see. I will advise them to concentrate on the Federal Government and allow us to do our job.”

The state government, therefore, assured the people of the state and its business partners that there was no cause for alarm on its financial state which it described as “very healthy” and under the control of a “prudent and efficient administration.”

Faulting the FRC report, the Ondo State government said the claim that the state was over-indebted did not capture the present state of things in the sunshine state.

The state’s Commissioner for Information, Mr. Kayode Akinmade, said the report was outdated and did not reflect the current reality.

He said: “Going by the date of the report, this could not have been the latest status of Ondo State’s debt profile, because this is a 2011 report.

However, from time to time, we go to look for finance from the money and capital markets.

“Every state carries some debt profile; ours is very sustainable. Our debt service ratio is below 20 per cent.”

Also, the Lagos State government noted that the state was solvent and capable of redeeming any of its commitment. The state government said the observation of the FRC that the state was one of those in serious debt was careless and capable of causing disaffection.

The Commissioner for Information and Strategy, Mr. Lateef Ibirogba, questioned the genuineness of FRC’s submission, adding that Lagos had not borrowed money for recurrent expenditures, but for capital projects.

He added that it was standard practice for government to source money for some of its capital projects.

Ibirogba said, “Lagos State is not in any serious debt. I don’t know where FRC got its information from. We have not borrowed to pay salaries or any other recurrent expenditure. The funds sourced for are being used for capital projects for the benefit of the residents.

“The state has not defaulted in any of its commitment to its creditors. The bonds that government had floated are being serviced as and when due.

As a matter of fact, any of our bonds are usually sold out. If the state is in serious debt, we couldn’t have done all these and more.”

The question, however, is whether or not states or Nigeria are in a precarious debt situation. If the various comments of the Coordinating Minister for the Economy and the Minister of Finance, Dr Ngozi Okonjo-Iweala, are anything to go by, then, there is no cause for alarm as far as debt situation in the country is concerned.

According to the minister, the Federal Government, with the assistance of the DMO, is closely monitoring states debt with the aim of ensuring that it never goes beyond the sustainability level and that borrowing are applied to specific projects that yield results for citizens of the states.

Analysts have also faulted the FRC on the usage of a single index to compute the states’ debt situation. According to them, indices, such as states statutory allocations, IGR and income from other sources, in addition to amounts owed local contractors, should have provided the commission with a near situation of states debt.

Besides the single index, they contended that the time of the report would not give accurate report on the real status of individual state debt. Since the report is a 2011 one, they opined, so many variables may have changed in the state which the FRC did not actually capture.

Better still, they contended that FRC should have left the job of computing states’ debt to the DMO, which is the body statutorily responsible for doing such job.

Analyst also stated that there was nothing wrong in borrowing by states, as borrowing is part and parcel of development. They said some states should desist from frivolous application of state funds to mundane items, such as jets and other unnecessary items.

Okonjo-Iwewala captured the issue succinctly when she expressed the concern of the Federal Government on the frequency of states borrowing by saying that banks and other lenders should be careful and prudent when lending and that they should do so in compliance with the existing rules, regulations and guidelines.

The FRC may have stirred the hornet’s nest with its 2011 report on debt status of states, it is the opinion of analysts that the situation may not be so serious as being painted by the commission, since only nine out of 36 states are reportedly swimming under excruciating debt burden.

Though Nigeria is a federation, those states that refused to subscribe to the FRA have been enjoined to fully subscribe to the Act so that they would be under the watchful eyes of the FRC.

However, the opinion of analysts is that states should watch the way and manner they contract debt. They added that very soon, the bubble might burst, if care was not taken.