Concern Mounts over States’ Fiscal Sustainability

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Yue Man Lee
  • Only three states can survive without federal funds, says BudgIT report

James Emejo in Abuja

World Bank’s Senior Economist, Yue Man Lee, wednesday raised the alarm that the fiscal capacity of the 36 states of the federation and the Federal Capital Territory (FCT) has declined while their fiscal sustainability risks have also increased.

While pointing out that the states’ revenues have largely underperformed, she stressed that the recent growth in non-oil revenues particularly Value Added Tax (VAT) was not enough to offset the drop in statutory transfers.

This is coming as a new report has revealed that only Lagos, Rivers and Akwa Ibom States could currently meet their recurrent obligations with state-owned resources, while 33 other states cannot operate without federal funding.

The Bretton Woods institution’s expert further queried the quality of spending on human capital particularly in health and education, noting that Nigeria currently spends little and with poor outcomes.

Lee, stated that there had been instances whereby several other countries had spent as little as Nigeria on health but with much better outcomes.

Speaking yesterday at the launch of the State of States’ Report 2019, which is a research into issues of fiscal sustainability of Nigerian states, conducted by BudgIT, the World Bank economist, said the issue of quality spending must be addressed.

Lee added that other countries with low levels of spending have had better health outcomes- and wondered why the country should not produce better results with relatively low spending.
She said despite improvement in states’ IGR since 2015, total state expenditure had been constrained by low revenues and has declined in real inflation- adjusted terms.

Lee said there had been a shift from capital expenditure towards recurrent expenditure, particularly personnel costs while capital expenditure had declined compared to 2011 estimates.
She added that when revenues decline generally, the recurrent expenditure becomes difficult to reduce, thus leading to increase in states’ total deficit.

According to her, the situation has further compelled states to borrow, adding that their total debt had doubled between 2014 and 2016 and remained at elevated levels.

She said the fiscal constraints had created a situation where states were unable to pay contractors, civil servants and pensioners, describing it as “the worst form of debt.”
She stated that the country is currently faced with a twin challenge of human capital development and diminished fiscal capacity of states to respond.

According to the bank’s representative, the World Bank recently launched the human capital index, which measured how human capital contributes to productivity, capturing three main indicators, including survival, education and health.

Lee said despite some progress against some of the indicators, the country was lagging in all three components.

“And out of 157 countries, Nigeria ranked 152 and I think this is quite very shocking result and we should be shocked. The poor capital outcomes are partly because investments are too little…
‘For education for example, Nigeria spends about 1.7 per cent of GDP compared to about 4.7 per cent average for Sub Saharan Africa. Nigeria both spends very little and the quality of education is very low,” she added.

She, however, said she was hopeful that fiscal transparency and accountability and strong political leadership will enhance states’ fiscal capacity going forward.

However, the State of States’ report further showed that only Lagos, Rivers and Akwa-Ibom states could meet their recurrent obligations with state-owned resources, adding that 33 other states cannot operate of their own accord.

It also indicated that only 19 states can meet their recurrent obligations with IGR and gross FAAC allocations.

Speaking during the unveiling, Principal Lead, BudgIT, Mr. Gabriel Okeowo, said though the Nigerian states are not out of the woods due to the sub-optimal federalism system, which the country operates, the recent one-off payments, including the Paris Club refund, refund for federal road projects to states, budget support funds as well as loans by the Central Bank of Nigeria (CBN), all helped many states with fiscal challenge to mildly recover.

He said there were consistent issues around the weak economies of states mostly tied to informal trade and skeletal industrial output with exception of Lagos, Rivers, Delta, Ogun and Akwa Ibom.
He also said Lagos led the current fiscal sustainability index, followed by Rivers, Akwa Ibom and Kano.

The report also showed Delta State as running huge recurrent expenditure of N200 billion, while Bayelsa State, despite its size and population, had a high recurrent bill of N137 billion compared with Ebonyi with N30 billion; Sokoto, N38 billion; Jigawa, N43 billion; and Yobe N35 billion.