The Debt Management Office (DMO) has advised states seeking to borrow from any bank or raise fund from the bonds market to first seek the approval of the Minister of Finance and secure it before embarking on such such transactions.
The measure, which complements the existing rules which requires Federal Government and National Assembly’s approval before a state can borrow from external creditors, is intended to reduce the sub-national governments’ exposure to debt risks.
The Director-General, DMO, Patience Oniha, who confirmed the latest measure contained in the ‘Subnational Borrowing Guidelines’, explained that past experiences on states’ borrowing trend showed that some of them did not follow due process with the attendant negative implications for the nation’s debt management.
She explained that the criteria set in the guidelines for sub-national governments to borrow would help in improving the efficiency of the national debt management objectives, particularly subnational governments’ debt sustainability.
She recalled: “Some banks lent to some states without the approval of the Minister of Finance. We could have simply told the banks to go and write off the debts, because they did not comply with due process. We looked at the impact this could have on the economy and waved it aside.
“Now, no bank needs to be told that the Minister of Finance must give her express approval before it can lend to a state government. The Minister of Finance gets a letter from the state governments seeking for loans; the DMO is copied.
“When the minister gets a letter, she minutes it to the DMO for proper advice. We look at the indebtedness of the state. We check how much it costs them to service the debt already in their portfolio.
“The criterion is that the cost of servicing the debt, including the new one being requested, should not be more than 40 per cent of their revenue in the past 12 months. What we recognise as the states’ revenue is what they receive on monthly basis from the Federation Account, because this can be easily verified”, Oniha clarified.
According to her, the DMO recently turned down requests to borrow from a few states due to the fact that such approval would have taken them beyond the approved 40 percent debt servicing threshold of their revenue.
The Subnational Borrowing Guidelines provide, inter alia, that: “Without prejudice to the provisions of the Nigerian Constitution, all banks and financial institutions requiring to lend money to the federal, state and local governments or any of their agencies shall obtain the prior approval of the Minister of Finance in accordance with Section 24 of the DMO Act, 2003, and the Fiscal Responsibility Act, and shall state the purpose of borrowing and the tenor.
“The monthly debt service ratio of a subnational, which includes the commercial bank loan being contemplated, should not exceed 40 per cent of its monthly federation allocation of the preceding 12 months.”
“Given the country’s recent experience with an unsustainable public debt portfolio, it is important that measures are taken to prevent a relapse into debt unsustainability. This challenge is quite demanding, because the federal and state governments need to mobilise substantial resources in order to fund the growth and development of the economy.
“In this context, it is necessary to have subnational borrowing guidelines in addition to the existing borrowing provisions, so that the states could be assisted to be prudent in their borrowing and debt management activities”, the guidelines added.
The DMO stated further that the guidelines became necessary to put measures in place to avoid a situation where Nigeria would be plunged into another debt trap era after the country exited from the Paris and London Clubs of creditors’ debt traps.
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