- The recent unification of the foreign exchange rate by the Central Bank has significantly impacted the external debt burden.
- Before the policy change, the external debt of the 36 states and the FCT stood at $4.56 billion, valued at N2.01 trillion using the former fixed exchange rate.
- After unification, the external debt stock has increased by 41.9% to N3.46 trillion, with Lagos, Kaduna, and Edo states experiencing significant increases in their debt valuation.
The recent unification of the foreign exchange rate by the Central Bank has dealt a huge blow to the external debt burden of some Nigerian states.
Before the apex bank’s forex unification policy, the external debt burden of the 36 states and the FCT stood at $4.56 billion, according to data from the Debt Management Office (DMO). Using the former CBN’s fixed rate of $1/471, the debt valuation in naira stood at N2.01 trillion.
Increase in naira valuation of state external debt
However, using Nairametrics’ daily exchange rate monitor of N758/$1, the external debt stock has risen to N3.46 trillion- a 41.9% increase since the unification.
Leading the pack is Lagos state which has seen the naira equivalent of its $1.25 billion external debt increase from N588 billion to N947 billion. This was followed by Kaduna state whose $573 million debt increased from N269 billion to N434 billion. Others are an Edo state with $209m (N98.4 billion) and now N158 billion.
Furthermore, the naira equivalent of the Federal government’s external debt of $37 billion has risen from N17.5 trillion to N28.1 trillion.
Implication on state’s finance
The implication of this is that states will have to source more naira to meet the debt servicing of these loans and pay up these loans in a time of already strangled government revenues and ballooning government expenditure.
This will put a strain on investments in other sectors like infrastructure, education, agriculture and health.
On a positive note, the unification will bring about increased revenue to states the funds from the FAAC are expected to increase.
Although these are still early days in the FX unification policy, it is believed the market will settle down to around N600 in the coming months according to JP Morgan.
Background
Experts and investors have consistently called on the CBN to unify the foreign exchange market as the multiple exchange rate regime breeds corruption, discourages investment etc. This came to an end on the 14th of June when the apex bank said in a statement
- “Abolishing the segmentation of the FX market into different windows. All transactions will now be done through the Investors and Exporters (I&E) window, where the exchange rate will be determined by market forces.
- Applications for medicals, school fees, BTA/PTA, and SMEs would continue to be processed through deposit money banks”
This move sent the exchange rate on the I & E window to jump between N700 and N800 to the USD.
