State of States Report: How Naira devaluation exposed many states to greater financial risk

THE recent devaluation of the naira, resulting from Nigeria’s decision to liberalize its exchange rate, has intensified financial pressures on many states, significantly increasing their foreign debt repayment obligations.

BudgIT, a prominent civic-tech organisation advocating for fiscal transparency in Nigeria, released its annual “State of States Report,” where Rivers State leads in fiscal performance, while Lagos State holds the highest foreign debt in dollar terms.

The report highlights the financial vulnerabilities exposed by the naira’s depreciation, especially among states with substantial dollar-denominated debt, including Kaduna, Edo, Ondo, Bauchi, Lagos, Enugu, Ebonyi, and Anambra. For instance, Kaduna and Edo states have the highest foreign debt-to-total debt ratios at 86.06 percent and 60.54 percent, respectively.

The debt burden is uneven across Nigeria, with subnational debt per capita averaging N40,469 in 2023. Lagos State, the most indebted state per capita, has a staggering N138,034 debt per citizen. Experts measure net debt per capita as a crucial indicator of a state’s default risk: the lower the debt per citizen, the lower the default risk.

Beyond debt, states also face various other liabilities, amounting to N1.19 trillion, which include contractor arrears, pension and gratuity backlogs, salary arrears, judgment debts, and miscellaneous liabilities.

The total debt stock of Nigeria’s 36 states surged by 38.1 percent, from N7.25 trillion in 2022 to N10.01 trillion, driven by a domestic debt increase of N606.12 billion and a 4.1 percent rise in foreign debt, from $4.43 billion in 2022 to $4.61 billion in 2023. As the dollar-naira exchange rate jumped from N899.39 to N1,492.9 in 2024, the resulting shift further widened the debt repayment obligations by N2.74 trillion.

Lagos remains the most indebted state in foreign currency, with obligations totaling $1.24 billion, representing 26.9 percent of the national subnational foreign debt.

BudgIT’s 2024 report, themed “Moving Healthcare Delivery from Suboptimal to Optimal,” ranks states based on five metrics. These include the ability to cover recurrent expenditures with Internally Generated Revenue (IGR), year-on-year growth in IGR, the capacity to cover operating expenses and debt obligations without borrowing, and debt sustainability indicators such as foreign debt as a percentage of total debt, debt as a percent of revenue, and debt service costs.

Rivers State retained its top spot in fiscal performance, while Cross River broke into the top five. Conversely, Jigawa experienced a steep decline, dropping to 36th. Rivers and Lagos are the only states that generate enough IGR to cover their operating expenses, with respective ratios of 121.26 percent and 118.39 percent.

Other states like Ogun, Anambra, Cross River, Kwara, Kaduna, and Edo manage to generate at least 50 percent of their operating costs from IGR, with the rest dependent on federal allocations.

In contrast, states like Akwa Ibom, Imo, Taraba, Yobe, Bayelsa, and Jigawa need over five times their IGR to meet their operating expenses, highlighting their dependency on federal revenue. Despite these challenges, all 36 states collectively covered their recurrent expenditures without needing additional borrowing.

This achievement is notable, as it underscores the resilience of subnational finances amid rising expenditures. In 2023, the cumulative revenue of all states increased by 31.2 percent from N6.6 trillion in 2022 to N8.66 trillion, driven largely by a 33.19 percent rise in federal allocations due to the removal of the fuel subsidy. Lagos alone contributed N1.24 trillion to this total, representing 14.32 percent of all state revenue.

Despite revenue growth, 32 states still rely on federal allocations for at least 55 percent of their total income, with 14 states relying on these allocations for 70 percent or more of their income. This heavy dependence underscores states’ vulnerability to oil revenue volatility and other external economic pressures.

The total expenditure across all states increased by 21.19 percent to N9.78 trillion in 2023, with Lagos leading in expenditures, disbursing over N1.49 trillion. Personnel costs, overhead, and capital expenditure saw increases of 12.9 percent, 26.75 percent, and 37.3 percent, respectively. Debt servicing alone required N1.25 trillion, or 12.8 percent of total spending, while additional unrecorded expenditures on contractor arrears and pensions amounted to N287.56 billion.

For states to achieve fiscal sustainability, BudgIT emphasized the importance of reducing reliance on foreign loans, especially given currency fluctuations and fiscal pressures.

Iniobong Usen, BudgIT’s Head of Research and Policy Advisory, suggested that states focus on mobilizing revenue through natural resources, technology, public-private partnerships, and sound fiscal management. BudgIT also advocated for transparency in debt management, urging states to allocate borrowed funds to high-impact projects with measurable economic returns.

The report also discussed healthcare spending, revealing that the 36 states budgeted N2.3 trillion for health but spent only N1.39 trillion, achieving 58.16 percent of their budget. Of the amount allocated for medical equipment, nine states, including Edo, Ekiti, Katsina, and Ogun, reported no spending in 2023. While N104.27 billion was invested in building and renovating healthcare facilities, and N15.31 billion on drugs and medical supplies, Delta, Ebonyi, and Niger states had no records of these expenditures. Healthcare infrastructure remains inadequate, with a shortage of facilities, drugs, and medical professionals. Nigeria has a doctor-to-patient ratio of four doctors per 10,000 patients, significantly below the World Health Organization’s recommended ratio of 1:600. In Taraba State, the ratio is even worse, at 1:17,959.

Infectious diseases also pose a severe threat, with malaria being a prominent concern. Borno State reported 527,305 malaria cases in 2023, with 15,036 being severe. Other states are similarly affected by diseases such as cholera, tuberculosis, and measles, especially in northern regions. Shortages in healthcare infrastructure and personnel hamper states’ abilities to manage these diseases effectively, while primary healthcare facilities serve an average of 8,960 people per facility, putting significant strain on existing resources. As subnational health facilities face mounting pressure, improving healthcare delivery and fiscal sustainability remains crucial for long-term stability and resilience in Nigeria’s states.

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