A new report by global credit ratings company, Fitch, has shown that state governments in Nigeria do not execute 40 percent of the capital expenditure in their various budgets.
The report, the Nigerian States Framework Report highlighted how debt servicing affects state governments’ ability to execute CAPEX.
It said all Nigerian states rated by Fitch are on Positive Outlook, reflecting that of the sovereign (B-/Positive) and the Federal Government of Nigeria’s policies that affect states’ operating revenue, debt stock, and debt service.
However, “The free-floating naira exchange rate has consistently increased external debt service, eroding the share of FAAC available for autonomous spending, as external debt is serviced through direct deductions from transfers.
“Most Nigerian states rely on subsidised facilities from the federal government to finance their investments. Despite significant capital expenditure needs, states struggle to fully utilise budgeted capex due to funding and implementation constraints, with an average of only about 60 percent of budgeted capex executed.”
The report added that Nigerian states face several challenges as “Internally generated revenue growth remains subdued due to socioeconomic constraints and inefficiencies in tax collection.”
“Most states depend on FAAC transfers, with Lagos being an exception due to its higher IGR capabilities. Rising current spending, driven by high inflation and recent increases in the minimum wage, further pressures state finances.
“Fitch views the institutional framework for the Local and Regional government sector as evolving due to limited own-revenue-generation capacity, evolving debt and liquidity-management regulations and practices amid the devolution of a wide set of responsibilities to the states,” it added.
It said states have to provide key public services, such as healthcare and education, creating vertical fiscal imbalances that can result in structural funding gaps, in turn leading to higher debt or a propensity to offload risks off-balance sheet.
The Fitch-rated subnationals include Kaduna, Oyo, Benue, Kogi, and Lagos States.
