The CBN fourth quarter report shows that while the federal government is cutting down its exposure in the domestic debt markets, state governments are fast filling up the space with new debt. The report notes that banking systems credit to the federal government at the end of the fourth quarter of 2017 went down 28 percent compared to corresponding period of 2016, when the federal government exposure to the banking sector was up 38.7 percent.
This shows that the federal government is making good its promise to cut down its dependence on the domestic markets. We have seen this in the recent repurchase of treasuring bills by the Debt Management Office (DMO) instead of rolling them over. The federal government is keeping to its plan of raising Eurbonds to pay down domestic debts. With the last successful US$2.5 billion successful Eurobond issue, the federal government now has enough war chest to take out about N762 billion of treasury bills off the market (see my column last week).
A key reason the federal government is pursuing this debt swap strategy is to create more room for the private sector to be able to borrow from the domestic debt markets and also drive down interest rates. The frequency of the federal government’s borrowing at very attractive interest rates has made it quite difficult for corporates to enter the domestic debt market since the only way they would be able to do that would have been to offer rates that are well above the federal government ‘risk free’ rates which at a time went above 20 percent for long term treasury bills (discussed in my column last week).
However, indications from the 2017 fourth quarter economic report of the CBN indicates that the state governments are stepping into the debt space that the federal government is creating by reducing its dependence on the domestic market. So while the exposure of the banking industry to the federal government declined in the period, the banking sector’s exposure to both state and local governments jumped up in the same period by a significant 18.9 percent.
With the federal government out of the way, the state governments are now muscling out the private sector as the banking sector exposure to the ‘core private sector’ for the same period was up by 0.1 percent only. The states and local governments are the ones taking advantage of the drop in interest rates rather than the private sector.
This sharp increase in banking sector’s exposure to states and local governments in the fourth quarter of 2017 should be of concern to “wanna be governors.’ This should especially concern the about 18 states with governors whose tenures are coming to an end in 2019. Are these governors whose tenure expire in 2019 building up unsustainable debts for their successors? It has happened in the past and it could be repeating itself all over again. This does not rule out the fact that governors with a chance for a second term are also building up debt perhaps in a bid to enhance their chances of winning a second term.
It is even more worrisome because many of these states are already highly indebted. As at September 2017, the total debt outstanding of the country’s 36 states and the Federal Capital Territory (FCT), Abuja stood at N3.94 trillion.
However, Lagos alone accounts for about 37 percent of the total debt stock. But Lagos is also known to have the financial muscle and capacity to repay its debts. The same cannot be said about many of the 35 remaining states. So a potential debt build-up, especially in a pre-election year, could present potential risk to the capacity of potential governors to fulfil their electoral promises.
As it is currently, many states are already struggling to pay salaries. The Trade Union Congress recently disclosed that 35 states, except Lagos, are currently owing salaries or allowances in one way or the other. If most states are struggling to pay salaries, the implication is that the same states are making little or no investment in critical infrastructure. Most of the states have survived in the last two years mainly due to the several bail outs that the federal government has offered.
Vice President Yemi Osinbajo disclosed in February during a visit to Kogi state that the federal government has spent about N1.19 trillion as bail out to state governments in the last two and half years. What is interesting about these bail outs is that they have not improved the finances of the states. They still remain highly indebted and dependent on federal allocations and as it is being seen in the CBN quarterly report, also on borrowing from the banks.
For those eyeing the governorship seats in the states, they should be preparing to inherit these states that are already highly indebted, and most of which have very low capacity for internally generated revenues. Unless these potential governors have a clear strategy to deal with this, they are doomed from the very first day they take over their states. Things are likely to even get worse, considering the politically tainted discussion about increasing minimum wages by the end of this year. States already saddled with debts will now come face to face with dealing with a higher wage bill, courtesy of the new minimum wage that is likely to come on stream later this year. So for those seeking to be governors, there are tough times ahead
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