So, state governments in Nigeria have formed the habit of borrowing indiscriminately and getting into avoidable debts.

Worse, they turn to the federal government to bail them out.

To prevent that from happening, the state governments can no longer borrow from the banks or the bond market without the express approval of the Minister of Finance acting on the advice of the Debt Management Office, Punch reports.

Already, no state government can get foreign loans without the approval of the Federal Government, which acts as a guarantor, and the National Assembly, which must give its nod to any foreign loan by any tier of government.

The 36 states of the federation and the Federal Capital Territory have raised Nigeria’s domestic debt by 1.64 trillion naira 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, confirmed this and told the newspaper: “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.

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“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.”

Explaining further, Oniha said: “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% 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.”

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