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State govts relying too much on bank loans — MPC

•Accounts for 74% of banks’ credit to govt

By Babajide Komolafe

STATE governments in Nigeria are increasingly relying on bank loans to finance their operations, thus undermining their statutory allocation with Irrevocable Standing Payment Order, ISPO, an automatic loan repayment structure tied to the allocation.

A member of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), Professor Mike Obadan, made this observation in his personal statement at the last meeting of the Committee held last month.

Noting that state governments now account for 74 percent of total bank credits to the public sector, he called for measures to ascertain how they spend the funds borrowed from the banks.

He made this observation while calling for caution against further borrowing by the federal government, a view supported by other MPC members, who also noted that the borrowing activities of the states and Federal Government are constraining growth of credit to the private sector, which dropped to 9.0 percent in May from 9.4 percent in June, as indicated by the current CBN data on credit to the economy.

The professor of economics stated: “The Federal Government debt poses a serious burden with nearly 30 percent of the budget devoted to debt servicing. Although the debt-GDP ratio is relatively low, the debt – revenue ratio is very high. And it must be stressed that GDP is not used to service debt; rather is revenue in the case of domestic debt or export earnings in the case of external debt.  Therefore, caution must be exercised on further borrowing while domestic revenue mobilisation efforts are stepped up.

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“The state governments also need to exercise caution in borrowing from commercial banks. The available data indicate that state governments are relying too much on bank loans compared to the other tiers. They account for 74 percent of bank credit to the governments. And apparently short-term credits are being used by the state governments to finance consumption or long-term projects. This compounds their financial woes as deposit money banks obtain direct debits from their Federation Account Allocations. There is need to ascertain the deployment of bank loans by state governments while they should mobilise more Internally Generated Revenue to finance development.”

Also noting the threat of rising public debt to economic growth, another MPC member, Dr.  Robert Asogwa, expressed worry over the federal government increasing appetite for Eurobonds, which he noted is associated with high interest rate.

Asogwa, who is also the  Team Leader for the Inclusive Growth Unit of the United Nations Development Programme (UNDP), said: “The rising public debt levels in Nigeria when added to a variety of other financial sector specific risks seems to dampen the prospects of growth in the near term.

“Moreover, the increasing appetite for internationally private held debt and a persistent hunt for Eurobonds is worrying. Besides the associated high cost of borrowing, the huge debt levels crowd out other development spending given the portions of government revenue allocated annually to service the debt. A coordinated domestic revenue expansion with simultaneous fiscal prudence will be key to addressing the current weak fiscal position of the economy.”

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