Federal Government’s Tough Conditions for Saving Bankrupt States


After a spate of insolvency among states, the federal government has responded with bailout conditions that show it wants the states to think more fiscal autonomy. But the federal government needs to back the federating units with a truly federal structure to achieve the fiscal stability plan it desires. Vincent Obia writes

The federal government has sent an important message to the 36 states of the federation following a rather embarrassing wave of bankruptcy and pressure for bailout. It has compiled a set of tough conditions that states must fulfil to access a federal government bailout. Special adviser to the president on political matters, Mr. Babafemi Ojudu, announced on Wednesday that the federal government was earmarking N90 billion as a special loan package for states that have serious financial problems. But to be eligible to draw from the fund, Ojodu listed 22 stringent conditions to be satisfied.

The conditions focus on efficient and transparent revenue mobilisation, expenditure, and budgeting methods in line with international best practice. They include that a state must, “Set realistic and achievable targets to improve independently generated revenue (from all revenue generating activities of the state in addition to tax collections) and ratio of capital to recurrent expenditure,” and, “Quarterly financial reconciliation meetings between federal and state governments to cover VAT, PAYE remittances, refunds on government projects, Paris Club, and other accounts.”

There must also be sharing of the “database of companies within each state with the Federal Inland Revenue Service. The objective is to improve VAT and PAYE collection,” and review of “all revenue related laws and update of obsolete rates/tariffs.” The federal government has, certainly, recognised this period as a time to focus on the fiscal potentials of the states, to see what they are doing and what they can do. This, indeed, is the time to think again about the laws and the political structure that have prevented the country from practising true federalism and hindered competitiveness and progress on virtually all fronts.

The main culprit here is section 44 (3) of the 1999 Constitution, which states, “Notwithstanding the foregoing provisions of this section, the entire property in and control of all minerals, mineral oils and natural gas in, under or upon any land in Nigeria or in, under or upon the territorial waters and the Exclusive Economic Zone of Nigeria shall vest in the Government of the Federation and shall be managed in such manner as may be prescribed by the National Assembly.”

It has become apparent that the ultra-centralisation of resources under a pseudo-federal system can no longer feed the craving of the federating units. It has obstructed national development. The states need to be statutorily empowered to develop their full potential for collective national progress.

In July last year, the Central Bank of Nigeria packaged a special intervention fund of about N300 billion, which was given in the form of soft loans to states to enable them settle a backlog of salaries. The states have also enjoyed a debt relief programme designed by the Debt Management Office to enable them restructure their commercial loans of over N660 billion and extend the life span of the loans while reducing the debt-service burden.

Still unable to lift the largely unviable and federal-dependent states out of bankruptcy, the federal government last month designed a fiscal sustainability plan to help the states. This was in the face of dwindling federal financial allocations occasioned by the drastic fall in crude oil prices. The emphasis was also on more proactive revenue mobilisation and prudent management of resources. All these point to an increasing pressure to move from the current restrictive quasi-federal structure to a truly federal system that would help to unlock the potentials of the states.

True federalism or fiscal federalism is the antidote to the incessant insolvency in states. The country must move away from the present excessive focus on the central pool, to the deliberate development of the fiscal economies of the federating units. This can only be achieved through aggressive diversification and devolution of power from the centre.

Virtually every Nigerian who can speak and be heard has said this. Elder statesman and Second Republic vice president, Dr. Alex Ekwueme, reiterated the call for true federalism last Sunday in Enugu at the 17th annual convention of the Igbo Youth Movement, which had the theme, “Nigeria, still in pursuit of true fiscal federalism.” Calling for the structuring of the country into viable fiscal units and resource control by the federating units, Ekwueme said, “The British colonial masters divided the country in such a way that every region will operate within its constitution.” Former information minister, Professor Jerry Gana, who was guest speaker at the occasion, spoke in a similar vein. Gana stated, “True fiscal federalism is the only form of association that will allow peace and stability in the country and each region should be allowed to manage its resources the way they want it.” He criticised the current resource ownership and allocation structure that makes the federal government richer while the states operate like beggars. “States should be allowed to manage their resources to enable them govern their people the way they want and allocate some percentage to the federal government,” Gana said.

Several studies have confirmed that every state in Nigeria is so richly endowed that if allowed to exploit their resources, they would not only be economically viable, but also buoyant. It was on the basis of such a structure, which recognised the capability and right of the component units to develop and survive independently, that the various peoples that make up Nigeria were brought together to form a country in 1914. It was on that basis that Nigeria attained independence in 1960. And it was on that basis that the regions, the former federating units, achieved the excellent socio-economic development that made Nigeria the pride of the black race.

That was when the constitution, the 1963 Republican Constitution, provided, “There shall be paid by the Federation to each region a sum equal to 50 per cent of (a) the proceeds of any royalty received by the Federation in respect of any minerals extracted in that region; and (b) any mining rent derived by the Federation from within that region.”

The aberrational federalism that followed from 1966 has been a terrible drawback to development. Rather than thinking of how to deepen bailout for states under the current system, President Muhammadu Buhari should devise approaches to return the country to fiscal federalism and resource control by the federating units. This is especially important now that the National Assembly is in the process of amending the 1999 Constitution.
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