As borrowing from banks hits N954b

The periodic report of the Central Bank of Nigeria (CBN) the other day on the operations of the commercial and merchant banks indicate that by the end of March 2020, the federal, state and local governments were indebted to the banking system to the tune of about N950 billion.

This indicates clearly that the various governments in the federation have not relented in borrowing in all fronts – from the banking system, the domestic capital market and from external multilateral agencies among others. Indeed, unbridled borrowing has now become a standing policy of the various governments in the federation. While the Federal Government’s exposure to the banks fell slightly from about N132 billion in 2018 to about N92 billion in 2019, the indebtedness by the states and local governments rose over the same period, from about N758 billion in 2018 to N885 billion in 2019.

The increased borrowing by the state and local governments clearly indicate that these governments are under intense pressure for funds to pay salaries, pay contractors as well as pension benefits, among others. This is dangerous. 

It is interesting to note that while these states and local governments are incurring these liabilities, they are also paying for the loans, both domestic and external, earlier taken for development projects within their jurisdictions. These are being reflected in the deduction at source to their allocations during the Federal Accounts Allocation Committee (FAAC) meetings and through the banking system. Indeed, the states particularly have been going through lots of financial challenges over these periods, one of the indications being the spate of borrowings as reported in the CBN publication. Many of the states owe salaries of workers and pension benefits of retirees for several months thus making governance at these levels not really palatable. Many of the states and local government areas do not have the necessary economic base to increase their internally generated revenue and as such depend substantially on the monthly FAAC allocations alongside periodic borrowings to run the states and local governments. All these call for attention on how these lower tiers of government manage their budgets and the need for them to plug the loopholes in the managements of their finances. One area that needs urgent review is, for example, the humongous security votes these state administrations provide for their chief executives, which have become unrealistic given the parlous financial situations these states and local governments find themselves. 

Instead of addressing their bogus expenditure profiles, these lower tiers of government have been borrowing from the domestic commercial and merchant banks, the easy way out. This could be a case of “playing the ostrich.” It is very likely that these states wouldn’t mind having more loans but for the borrowing limits that might have been imposed on them by the banks. Otherwise, many of them would gladly borrow more to clear the backlog of salary payments and pension benefits. 

The solution to these challenges is the critical evaluation of the causative factors for this easy resort to borrowing by these state and local governments. First, the expenditure profiles of these states and local governments need a critical review. Loopholes appear to exist in their budgeting systems such that corrupt practices are being perpetuated by government officials who are milking the public till.  This has led to a recurring high incidence of unpaid salaries and pension benefits. Meanwhile, the officials are believed to be living big and acquiring assets both at home and abroad. This is a clear symptom of a bigger problem that needs to be addressed. Some of these bank borrowings may be for consumption given that infrastructural development in these states and local governments are hardly visible. This also applies to the Federal Government where pockets of projects being showcased by the administration fall far short of the humongous amounts being borrowed. This newspaper and many stakeholders have been sounding the alarm but the three tiers of government in the federation appear deaf and dumb. It is unfortunate in the extreme. 
 
Another solution is to look at the viability of the states themselves. This is a fundamental issue. A good number of these states are not viable ab initio. They were created in the era of free money during the periods of economic booms without the issue of their long-term viability adequately considered. Along these lines, it would be proper for the country to consider a wholesale adoption of fiscal federalism in the managing of its finances at all the tiers of governance. This newspaper has been harping on this model but no one in authority seems to be concerned about this political question even as the state seems to be failing. 
 
Overall, total credit to the economy, according to the CBN report, has been on the increase with a welcome decline in the nonperforming loans to total loans from 11% in April 2019 to 6.6% in 2020. This is an indication that the CBN has been effectively managing its recent new loan-to-deposit ratio. In this regard, the growth in loans should be channelled to the private sector so that the economy can overcome the challenges of the COVID-19 pandemic. State and local governments should put their house in order and thus minimise their resort to the commercial and merchant banks for unnecessary loans. The country should be thinking of how to get out of the domestic debt trap instead of exacerbating it by unbridled borrowing by the tiers of government from the domestic banking system. They should not crowd out the private sector in the credit markets so that jobs can be created by the private sector for the ever-growing army of unemployed youths.