Investigations have shown that states will now have to depend on a formal approval by the Minister of Finance before their loan request from banks or bond market can be granted.
This is in a sharp attempt to reduce their exposure to huge indebtedness.
Already, no state government can contract external loans without the approval of the Federal Government, which acts as a guarantor, and the National Assembly, which must give its nod to any external loan by any tier of government in the country.
Recall that it was recently discovered thatt the 36 states of the federation and the Federal Capital Territory raised the nation’s domestic debt by N1.64tn in the past three years.
Following the conversion of loans owed by most state governments into bonds, the Federal Government now insists that no bank should lend to the state governments without clearance from it.
The Director-General, DMO, Patience Oniha, confirming the development in an interview said: “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.”
Oniha added, “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 disclosed that the DMO recently turned down requests to borrow from a few states, because approval would have taken them beyond the threshold of servicing debts with more than 40 per cent of the revenue.
In a few cases, the DMO has had to advise the states to reduce what they wanted to borrow to ensure that it stayed within the limits stipulated by the Subnational Borrowing Guidelines articulated by the agency.
Oniha, however, declined to mention the states involved, because it would breach the confidentiality understanding that the DMO had with the states.
The Subnational Borrowing Guidelines obtained by our correspondent state, “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.”
The guidelines explained that it became necessary to put measures in place to prevent the country from relapsing into unsustainable debts after Nigeria’s exit from the Paris and London Clubs of Creditors.
The guidelines stated, “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.”