States’ Dwindling Revenue and Urgent Need for Diversification

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State must walk the talk in diversification of their economies and think out of the box to harness domestic resources to stay afloat the socioeconomic and fiscal turbulence occasioned by the COVID-19 pandemic. James Emejo writes

Virtually every state of the federation presently has a blueprint for the diversification of its economy. But as lofty as the documents may appear, these were never brought to fruition.

In most states of the federation, there’s hardly any concrete economic activities besides the political and civil service engagements even though several reports/research interventions had pointed to the fact that all states are endowed with various natural resources that could be converted to economic opportunities.

Decades of over-reliance on crude oil revenues appeared to have dampened the urge for true diversification as governments both at federal and state levels have continued to access monthly funding from the federation account.

According to the National Bureau of Statistics (NBS), as at half-year, states including the Federal Capital Territory (FCT) had received a total sum of N1.12 trillion as monthly allocation from the Federation Account Allocation Committee (FAAC), representing 64.66 per cent of their total revenues for the period.

But the total value of Internally Generated Revenue (IGR) by the 36 States of the federation and Federal Capital Territory (FCT) declined N81.04 billion to N612.87 billion as at half year of this year compared to N693.91 billion recorded in half year of 2019. This indicated a decline of 11.7 per cent year-on-year.

According to the ‘IGR at State Level for Half Year 2020’ report, IGR for Q2 2020 also contracted by 26.5 per cent to N259.73 billion compared to N353.14 billion in Q1.

Lagos State had the highest IGR of N204.51 billion or 33.37 per cent of total revenue and closely trailed by Rivers, which recorded N64.59 billion or 10.54 per cent of total revenue while Jigawa posted the least revenue performance of N3.01 billion at half-year.

FCT recorded N35.20 billion or 5.74 per cent of total IGR; Delta, N30.84 billion or 5.03 per cent; Ogun, N23.68 billion or 3.86 per cent; Oyo, N17.77 billion or 2.90 per cent and Kano N17.50 billion or 2.86 per cent.

Others include: Akwa Ibom, N16.21 billion or 2.65 per cent; Kaduna, N14.54 billion or 2.37 per cent; Edo, N14.01 billion or 2.29 per cent; Ondo, N13.58 billion or 2.22 per cent; Enugu, N12.26 billion or two per cent; Anambra, N9.54 billion or 1.56 per cent; Plateau, N9.40 billion or 1.53 per cent; Kwara, N9.36 billion or 1.53 per cent; and Osun, N8.95 billion or 1.46 per cent.

Other states include: Cross River, N8.05 billion or 1.31 per cent; Imo, N7.73 billion or 1.26 per cent; Kogi, N7.43 billion or 1.21 per cent; Zamfara, N7.08 billion or 1.16 per cent; Ebonyi, N6.33 billion or 1.03 per cent; Abia, N6.18 billion or 1.01 per cent and Nasarawa, N5.90 billion or 0.96 per cent and Bauchi, N5.75 billion or 0.94 per cent.

Others are Katsina, N5.53 billion or 0.90 per cent; Bayelsa, N5.38 billion or 0.88 per cent; Borno, N5.37 billion or 0.88 per cent; Benue, N5.34 billion or 0.87 per cent; Sokoto, N4.59 billion or 0.75 per cent; Kebbi, N4.38 billion or 0.72 per cent; and Taraba, N4.06 billion or 0.66 per cent; and Niger, N4.01 billion or 0.66 per cent.

However, it is no longer news that with the exception of only a few states, most governments can hardly survive on their domestic revenue sources.

In its “State of States 2019” report, BudgIT had stated that only Lagos, Rivers and Akwa Ibom could fund their expenditure without allocations from the federal government.

No doubt the fiscal balance of states had further been impaired by the impact of the COVID-19 pandemic which had affected virtually every sphere of human endeavour.

If anything, the pandemic helped to expose the decade-long deceit about economic diversification which governments had continued to harp on without results as agricultural resources remained largely untapped until recent intervention efforts by the Central Bank of Nigeria (CBN) targeting to revive key value chains.

But for alternative financing sources particularly foreign and domestic borrowing, analysts believe government would have collapsed as they’ll be unable to meet basic contractual obligations.

It’s sometimes appalling to have some state governors point to supermarkets as investments which they had attracted into their states, after wasting millions in so-called foreign trips to woo investors.

But in spite of the decline in their IGR, the 36 states and the FCT had their total domestic debt stock at N4.19 trillion as at June 2020 with Lagos accounting for 11.77 per cent of the borrowing.

With monthly debt service obligations, analysts believe the prospects for economic development at state levels had further been jeopardised, as most states still owed workers several months of unpaid salaries.

However, analysts in separate interviews with THISDAY have proffered solutions to help the states recover from their fiscal challenges as well as improve on their revenue positions.

Professor of Finance and Capital Markets at Nasarawa State University, Prof. Uche Uwaleke, advised states to implement public sector transparency, accountability and good governance in order to attract grants from international donor agencies including the World Bank.

He further stressed the need to implement a unique identity for residents of the states with a view to widening the tax base.

According to the former Imo State commissioner of finance, to weather the storm, state governments should plug leakages in the public sector especially using technology to reduce cash contact in respect of government and persons.

Uwaleke said governments must, “explore more opportunities for public private partnerships in financing development projects; explore opportunities in the capital market to finance projects where the state has room for long term borrowing; identify and invest in a resource in which the state has competitive advantage so as to enhance its revenue generating ability and continuously improve the ease of doing Business in the state in order to attract investors.”

Also speaking with THISDAY, Managing Director/Chief Executive, Credent Investment Managers Limited, Mr. Ibrahim Shelling, said the way to increase IGR is to increase economic activity adding that grappling with multiple taxation in an already depressed economy will certainly stifle growth.

According to him, states could also look at moribund institutions and engage private sector to revive them and create employment.

“I think it’s necessary for states to harness their natural and human resources. Every state in Nigeria has natural resources that are valuable in the global market but they are often underutilised or not harnessed at all.”

Also commenting on the dwindling revenue, former Director General, Abuja Chamber of Commerce and Industry, Dr. Chijioke Ekechukwu, said addressing the issue of corruption and entrenching good governance could boost states’ fiscal positions in the current scenario.

He said: “What has been done to check the over invoicing of our contracts? Nothing. Absolutely nothing has been done. Why will it continue to be business as usual?

“These are questions waiting for answers. Our debt profile continues to rise because of rising deficit budget and no available solutions to address our revenue inadequacies.”

Ekechukwu said: “Every federating state has potential to take care of their total expenditures and even do better than they are doing currently, if only they look around themselves and optimise all the business and revenue generating opportunities.

“I really wish oil will seize to exist so that everybody will rediscover themselves. We cannot continue to run our government as if all is well. We don’t need a prophet to know that all is not well.

“So why are we using the same budgeting system that uses only incremental method. At a time like this, we should be deploying value proposition system and combine it with zero budgeting system.

“Making sure that funds will be spent only on necessaries. Today, you still see in all budgets of states and MDAs, operational vehicles which is subhead they use to pull through because of ban on official vehicles. These expenditure heads continue to reoccur in our budgets even when there are no need for them.”

Moreover, in his intervention, an Associate Professor of Agricultural Economics at University of Port Harcourt, Anthony Onoja, said in the face of dwindling revenues from IGR during COVID-19, there is a need to rejig the tax system and revenue generation strategies in the country.

He said the government should improve tax payer compliance, through audit, automated revenue payment systems linked with tax identification numbers as well as impose penalties, and enforce the recovery of outstanding debts.

According to him, reforms aimed at improving IGR should ensure appropriate system and process; appropriate human resource and environment; tax payer and public education as well as underpinned legal mandate and appropriate finding.

He pointed out that often, many businesses operate underground and are not captured in the tax system leading to many leakages in the revenue generating systems.

“Corruption as well as opacity or lack of proper accountability in revenue generating agencies are barriers to effective implementation of IGR systems in Nigeria.

“Examples are issues of ghost workers in many state institutions, rising number of illegal tax operators or agents who do not remit any kobo to government authorities as can be seen in the markets, along the roads, parks, Ports, borders, government institutions etc.”

According to him, to improve revenue, there is a need for government to eliminate all sources of revenue leakages especially through tax payers, revenue officials and banks; creation of online data base in respect of taxpayers whose taxpaying habits can be monitored in real-time as well as generating with a high degree of accuracy projected revenue of future periods from all sources among others.

According to BudgIT, only 19 states can fund their expenditure with IGR and FAAC revenues.

The report said: “The implications of looking at this index is to enable us understand without federal allocation, how many states can sustain themselves,” she said.

“And by sustaining themselves, we are looking only at the recurrent expenditure. Are you going to meet your operating obligations? Are you able to pay salaries so that anything coming from federal allocation would go to investments in the key sectors of the economy?

“When we look at the index, we can see that those states that can meet their expenditure only with IGR are only three states out of 36 states.

“What this means is that, if there were to be oil price fluctuations and production allocation from the centre were to reduce, then many states would be in jeopardy.”

It added: “Our belief is that Nigeria needs to create incentives for states to expand growth and earning potential, thereby activating resources needed to improve the state of health, education and access to opportunity.

“We believe that Nigeria possesses the required resources to change the dynamics of its population, but this will require strong leadership in a dynamic and competitive world.”