Can Nigeria’s sub-nationals curb debt stock?

Lagos, Delta, and Rivers states are among sub-nationals in Nigeria with the highest debts. As these states grapple with rising debt levels amidst the implementation of a new minimum wage and petrol price shocks, the question arises: can they sustain the drive to curb their debt stock? Iniobong Usen, Head of Research at Budgit, shed light on this pressing issue during a recent CNBC Africa interview. Usen's insights provide crucial information on the current state of states' debts in Nigeria and the strategies needed to address this complex economic challenge. The total domestic debt of states in Nigeria dropped by about 31% quarter-on-quarter to approximately 4 trillion Naira in the first quarter of this year. Despite this decline, concerns remain regarding the sustainability of this trend. Usen highlighted the importance of examining states' foreign debt as a percentage of their total debt. States with a significant amount of debt denominated in foreign currencies face heightened risks due to exchange rate volatility. It is crucial for states to ensure that loans are used to finance productive projects that can generate returns to facilitate debt repayment. However, many states have been investing in non-essential projects and recurrent expenditures, exacerbating their debt burdens. The over-reliance of states on federal allocations remains a key issue, with many states depending heavily on these funds for revenue. External shocks such as fluctuations in oil prices can significantly impact states that rely on federal allocations, undermining the credibility of their budgets. To enhance fiscal sustainability, states must prioritize domestic revenue mobilization by reforming tax systems and enhancing efficiency in expenditure. Measures such as digitizing tax collection and curbing leakages in revenue collection are essential for improving states' financial resilience. The challenge of complying with the new minimum wage of 30,000 Naira poses additional strain on states, with some already expressing concerns about meeting these obligations. Usen emphasized that the actual impact of the minimum wage increase extends beyond the base salary, as consequential adjustments can lead to a substantial increase in wage bills. Many states may struggle to afford the new minimum wage and consequential adjustments, requiring restructuring of the civil service to manage costs effectively. In light of these challenges, Usen's insights underscore the urgent need for states in Nigeria to adopt prudent fiscal management practices and prioritize sustainable development projects. Addressing debt sustainability, reducing reliance on federal allocations, and managing the impact of the minimum wage increase are crucial steps for states to navigate the complex economic landscape. By implementing strategic reforms and improving financial transparency, states can enhance their fiscal resilience and promote long-term economic stability.