Market News

By Sami Tunji

States collectively spent about N235.58bn on servicing external debt obligations in the first half of 2025, The PUNCH reports. This is according to an analysis of the data from the Federal Account Allocation Committee disbursement released by the National Bureau of Statistics.

The amount represents a sharp increase of N95.65bn or 68.4 per cent when compared with the N139.92bn recorded in the corresponding period of 2024, showing the mounting pressure of dollar-denominated debt repayments on state finances in the wake of the naira’s depreciation.

It is crucial to note that the Federal Government undertakes external debt servicing on behalf of the states through an Irrevocable Standing Payment Order arrangement, which authorises automatic deductions from their monthly FAAC allocations.

Under this process, once an external loan has been approved and a subsidiary agreement executed, the Office of the Accountant-General of the Federation, working with the Federal Ministry of Finance and the Central Bank of Nigeria, deducts the agreed debt service amount before releasing allocations to the states.

According to an analysis of data done by The PUNCH, January 2025 began with a hefty outflow of N40.09bn towards external debt servicing, a sum that dwarfs the N9.88bn paid in the same month of 2024. This represented a year-on-year jump of more than 305 per cent and was the highest single-month repayment in the first half of the year.

In February, the states collectively paid N39.10bn, a figure which, although slightly lower than January’s, was still markedly higher than the N24.53bn disbursed in February 2024, representing a 59.5 per cent increase.

March 2025 recorded the same N39.10bn, marginally lower than the N40.41bn paid in March 2024, reflecting the unusual spike that occurred in that month last year when some states made large payments to clear maturing obligations.

From April to June 2025, the pattern remained unchanged, with each month posting exactly N39.10bn in debt servicing outflows, suggesting relative stability of the local currency in the second quarter of 2025. This represents an 80.1 per cent rise compared with the N21.70bn paid in each of those months in 2024.

Lagos State, long acknowledged as the country’s economic nerve centre, retained its position as the single largest contributor to the overall debt servicing bill, remitting a total of N49.58bn in the first six months of 2025. This marks a 52.8 per cent increase from the N32.44bn recorded in the same period last year.

The size of Lagos’s foreign debt repayment, more than double that of any other state, reflects both its long-standing borrowing profile for large-scale infrastructure projects and the impact of exchange rate weakness on dollar-linked obligations.

Rivers State followed with N26.34bn, a leap from just N4.62bn in the first half of 2024, representing an increase of more than 470 per cent. Kaduna State ranked third with N24.47bn, a modest 6 per cent rise from the N23.09bn paid last year.

Ogun State came fourth with N12.57bn, nearly triple the N4.29bn recorded in the first half of last year, while Edo State completed the top five with N10.18bn, a 72.6 per cent increase on the N5.90bn paid in 2024.

Collectively, these five states spent N123.14bn, accounting for about 52.3 per cent of all external debt servicing payments made by the 36 states in the first half of 2025, highlighting the concentration of foreign debt exposure in a small group of subnationals.

At the lower end of the scale, Jigawa State recorded the smallest external debt servicing bill at N1.39bn in the first half of 2025, a 54.3 per cent increase from N900.54m in the same period of 2024. Benue followed with N1.44bn, up 62.1 per cent from N890.16m last year, while Yobe paid N1.46bn, representing a 77.0 per cent rise from N823.59m in 2024.

Borno State recorded N1.52bn, up 128.1 per cent from N668.07m, while Zamfara paid N1.56bn, 75.0 per cent higher than the N891.82m recorded in the same period last year. Plateau also featured among the states with comparatively low repayments at N1.81bn, though this was 125.8 per cent more than the N803.28m paid in 2024.

While these states maintain smaller foreign loan portfolios than their higher-ranked counterparts, the sharp year-on-year increases underline the nationwide effect of exchange rate depreciation on the cost of servicing external debt.

The data reveal interesting regional patterns. In the South-West, Lagos and Ogun lead, reflecting an aggressive use of foreign loans to fund infrastructure and other development projects, often at concessional rates but with significant exposure to exchange rate fluctuations.

In the South-South, Rivers and Edo have both posted large increases, while Cross River remained high at N9.82bn, up 24.8 per cent from N7.87bn in 2024. In the North, Kaduna remains the largest payer, while Bauchi recorded N8.13bn in repayments, up 28.5 per cent from N6.33bn last year.

The presence of Cross River, Bauchi, and other non-megacity states in the higher ranks shows that significant foreign debt is not limited to Nigeria’s most industrialised subnational economies.

The effect of the exchange rate on these figures is significant. Since most external debts are denominated in foreign currencies, a weaker naira increases the local currency cost of servicing those debts even if the actual amount owed in dollars or other foreign currencies remains unchanged.

This increase in the naira cost without any change in the foreign currency obligation places heavy strain on the budgets of states, especially those with limited capacity to raise internally generated revenue.

The PUNCH earlier reported that seven states spent an average of 190 per cent of their Internally Generated Revenue on debt servicing in the first quarter of 2025. Data from the Q1 2025 Budget Implementation Reports of Bayelsa, Adamawa, Benue, Niger, Kogi, Taraba, and Bauchi states show that debt service expenditure in each of the states exceeded their IGR, in some cases by more than 300 per cent.

The trend, when compared with figures from the preceding quarter (Q4 2024), also reflects a sharp quarter-on-quarter surge in debt service cost, which rose by approximately 51 per cent across the states reviewed.

The PUNCH observed that seven Nigerian states spent a total of N98.71bn on debt servicing in Q1 2025, marking a sharp increase of N33.48bn or 51 per cent compared to the N65.24bn recorded in the previous quarter.

For many, debt servicing now consumes a significant portion of their monthly allocations from the FAAC, leaving less room for recurrent expenditure and capital projects. A comparison with the 2024 figures shows some notable shifts in the rankings. Last year, Lagos, Kaduna and Cross River were the top three states in terms of external debt servicing, followed by Bauchi and Edo. This year, Rivers and Ogun have entered the top five, displacing Cross River and Bauchi.

Economists warn that without a significant increase in revenue generation, the rising debt service burden could crowd out spending on essential services and infrastructure.

The Director and Chief Economist at Proshare Nigeria LLC, Teslim Shitta-Bey, earlier warned that the rising debt burden on Nigeria’s subnational governments could challenge their fiscal stability in the coming years.

He stressed that most state governments, along with the Federal Government, had failed to effectively manage their balance sheets. Speaking to The PUNCH, Shitta-Bey said, “The challenge here is that most of the governments, including the Federal Government, are unable to manage their balance sheets properly. While borrowing might seem like an easy way to run operations, it is not necessarily the right approach.”

According to Shitta-Bey, borrowing should not be the default solution for governments. “Governments could consider longer-term debt structures that resemble equity, which might actually be more beneficial in the long run,” he explained.

He also called for a comprehensive register of national assets to help states raise capital. He used the example of the National Stadium, which had not been used for major activities for a while.

Shitta-Bey lamented the underuse of state revenue bonds, which were originally designed to generate revenue. “States need to focus on raising revenue bonds instead of general obligation bonds,” he said.

In a recent statement by the acting Director of Communication and Stakeholders Management at the Nigeria Extractive Industries Transparency Initiative, Mrs Obiageli Onuorah, the agency noted that the report highlighted the financial strain on states due to debt repayments, despite record-high disbursements from the Federation Accounts Allocation Committee.

According to the statement, a report by NEITI showed that several states with high debt burdens also ranked lower in FAAC allocations, raising concerns about their fiscal sustainability and ability to fund critical projects.

“The report noted that many states with high debt ratios were in the lower half of the FAAC allocation rankings but ranked higher for debt deductions, raising concerns about their debt-to-revenue ratios and overall fiscal health,” the statement read.

A macroeconomic analyst, Dayo Adenubi, also emphasised the need for states to take more targeted steps toward boosting internally generated revenue as they grapple with rising debt obligations and constrained federal transfers.

According to Adenubi, one key strategy is to raise consumption levels in order to increase Value Added Tax collections. He also stressed the importance of improving tax collection within state corridors, especially by enforcing taxes such as property taxes and transport-related levies, while ensuring that governments deliver on the social contract to maintain citizen trust and compliance.