FX Rate Increases Lagos Debt Burden By Over N650bn In 3 Days

The movement in the Nigerian Autonomous Foreign Exchange Market (NAFEM) rate between January 29 and February 1, 2024, increased Lagos State debt burden by over N650 billion in three days.

NAFEM rate moved from N890/$1 on January 29 to N1,413/$1 on February 1 — a span of just 3 working days.

According to the state government budget performance appraisal report for the first quarter of 2023, which was released in May by the state Ministry of Economic Planning and Budget, Lagos total external debt as of December 2022 stood at $1.25bn, while total debt stock to GDP was 4.5 percent.

Based on figure from the National Bureau of Statistics (NBS), the state recorded the highest domestic debt in the second quarter of 2023 with N996.44 billion, followed by Delta with N465.40 billion.

In July 2023, Fitch Ratings affirmed the state’s long-term foreign-and local-currency Issuer Default Ratings (IDRs) at ‘B-‘, reflecting a ‘very high risk’ that Lagos may struggle to meet its debt servicing obligations between 2023-2027.

Fitch Ratings is projecting the state debt stock to hit N2 trillion by the end of 2025.

“Nigeria’s framework for local and regional government debt is evolving so borrowing limits are quite wide. Nigerian states have no restrictions on debt maturities, interest rates or currency exposure. Lagos prudently keeps debt service at no more than 30 percent of operating revenue. To ensure timely debt service, its internal debt is assisted by a state-level irrevocable standing payment order while external debt is serviced by deductions from FAAC.

“External debt with development lenders accounted for 44 percent of Lagos’s total debt at end-2022, exposing the state’s debt service to the fast naira depreciation observed in June 2023. In particular, we expect a steep rise in Lagos’s debt stock by end-2023, driven by the exchange rate expected at end 2023 at over 700 NGN/USD from 448 NGN/USD at end-2022. Our scenarios consider that Lagos could hit NGN2 trillion debt stock by end-2025,” Fitch Ratings said.

Under a scenario in which the N/$ exchange rate remains above 700, Fitch Ratings expects Lagos debt to reach N2.7 trillion by 2027, or 190 percent of revenue.

To fund its 2024 budget of N2.267 trillion, the state plans to borrow N398.283 billion.

Meanwhile, worried by the continuous Naira depreciation, a former governorship candidate of the Action Democratic Congress (ADC) in Lagos, Funso Doherty, has stated how the burden of negative FX market developments is affecting the state.

In a letter dated February 9, 2024 to the National Assembly, Federal Competition and Consumer Protection Commission (FCCPC), Central Bank of Nigeria (CBN) and Security and Exchange Commission (SEC), the chartered accountant called for investigation into the recent developments in NAFEM.

Doherty listed state governments, taxpayers, salary earners, pension fund contributors and retirees as those bearing the brunt of the recent developments in NAFEM.

According to him, Lagos foreign debt is approximately $1.26 billion, adding that this amount is higher than its local currency debt obligations.

“Many State Governments owe substantial liabilities in foreign currency. My own state, Lagos State has foreign borrowings of approximately $1.26 billion. This amount is higher than its local currency debt obligations and is by far the highest of all the states in the Federation. The movement in the NAFEM rate in just the space of three days last week alone increased Lagos State’s debt burden by over N650 billion. This burden will ultimately be borne by current and future taxpayers in our state,” Doherty said.

“With devaluation of the Naira, the purchasing power of Salary earners and pension fund holders is substantially diminished. For retirees in particular, this deterioration is often permanent and irreversible. The sharp deterioration witnessed in the exchange rate in the past few weeks is potentially devastating for Retirement Savings Account holders numbering in the millions who, collectively, hold over N16 trillion in accumulated Naira-denominated retirement assets.”

He pointed out that “In view of the foregoing and, within the ambit of your respective mandates, I hereby call on The National Assembly, FCCPC, SEC and CBN to immediately commence investigations to establish the propriety or otherwise of the recent developments in NAFEM with a view to instituting corrective and punitive measures where appropriate.”