Forex crisis: Three states demand $501m loan repayment suspension

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The state governments of Ekiti, Cross River, and Ogun have proposed a suspension of their foreign debt repayments worth $501m due to severe foreign exchange volatility.

The proposal is part of their efforts to mitigate the heightened debt service burdens, which state officials claimed has significantly hampered their ability to service existing debts.

Checks by our correspondent from the Debt Management Office showed that the three states obtained multilateral and bilateral loans placing them among the top 10 states with the highest foreign debt stock as of December 2023.

Cross Rivers has the highest with $211.13m, followed by Ogun with $168.8m and Ekiti with $121.1m.

Details of these proposals were highlighted in the minutes of the Federal Account Allocation Committee meeting held in March 2024.

During the meeting, the Commissioner of Finance of Ekiti State, Akintunde Oyebode, noted that the financial strain caused by rising exchange rates had escalated the costs of foreign debt repayments.

He said the cost of foreign debt servicing had drastically reduced their share of the Federation Account and advocated for an extensive discussion on exchange rates and multilateral financing to address these challenges.

Oyebode also noted that significant deductions from the statutory revenue for savings had drastically reduced state balances.

The minutes of the meeting read in part, “The HCF, Ekiti State observed that there had been significant increases in the amounts deducted from the Statutory Revenue of the states for repayment of foreign loans due to the rising exchange rate. He, therefore, suggested the need for extensive discussion on exchange rates concerning multilateral financing to address the issue. Furthermore, he raised concerns about the amount deducted as savings from the revenue for the month and noted that the balances of the Sub-nationals had reduced tremendously as a result.”

Similarly, the Commissioner of Finance of Cross River State, Michael Odere, expressed fears about the state’s ability to fund capital projects due to reduced revenues.

He suggested a suspension of certain deductions, including those for multilateral loan repayments, especially when distributable revenue is low.

Odere also proposed that pre-FAAC stakeholder meetings be arranged to better manage financial allocations during periods of fiscal shortfall.

The Commissioner of Finance of Ogun State, Dapo Okubadejo, called for the redirection of the N200 billion previously earmarked as savings back into the federation account for redistribution among the states.

It added, “The HCF, Cross River State expressed fear that the States might not be able to fund capital projects as a result of a reduction in revenue. He advised that given the tight financial situation of the Sub-nationals, some of the proposed deductions should be suspended including repayment for multilateral loans. He also advised that whenever the total distributable revenue was low, a pre-FAAC meeting should be arranged with stakeholders to discuss ways to manage the situation.

“The HCF, Ogun States on his part, proposed that the N200 billion set aside as savings should be returned to the Federation Account for distribution to the beneficiaries. On the issue of multilateral financing, he proposed that a system should be put in place to effectively address issues associated with foreign exchange volatility. The HCF, Enugu State noted that if more funds were made available to States for infrastructural development, the revenue earnings of the States would increase.”

He noted that doing this would help to alleviate financial distress and support necessary infrastructural developments, enabling the states to better handle the unpredictability of foreign exchange rates impacting multilateral financing.

Commenting, the finance commissioner, Ondo State, Omowumi Isaac, also lamented the level of deductions from the account for the month, which resulted in low revenue distributable to the federation and suggested that some of the deductions should be reversed.

Responding to the request, the Minister of Finance, Olawale Edun, who is also the Chairman of the meeting, responded to these concerns, noting that discussions regarding foreign exchange, interest rates, and other economic challenges were ongoing at the National Economic Council.

He urged the states to relay their concerns through their chief executives/ governors for thorough consideration.

Edun also emphasised the need for strengthened cooperation between monetary and fiscal authorities to foster national development in these economically challenging times.

The DMO recently disclosed the total external debt stock of the 36 states and the Federal Capital Territory reached $4.61bn by December 31, 2023, from $4.46bn recorded in the previous year. In one year, the foreign debt of the 36 states and the FCT increased marginally by about 3.36 per cent or $150 million.

External debt servicing cost N120.01bn from states’ allocation in 2023 and N30bn between January and February 2024. This was an increase of 54 per cent (or N42.01 billion) from N78 billion deducted in 2022.