The Dwindling Fiscal Capacity of States

In this piece, James Emejo and Sonia Mayomi, write that state governments would have to think out of the box and urgently implement policies that would encourage both local and foreign investors to establish and create employment opportunities in their respective jurisdictions in order to boost non-oil revenue and help the sub-nationals exit their current fiscal dilemma

Nigeria is one of the countries that are synonymous with the term ‘oil curse’ because of the political and economic dysfunction occasioned largely by poor management or investment of oil revenues by the governments to better the living standards of the people.

The narrative is that the discovery of major oil reserves in 1956 ought to have resulted in long-term economic growth and prosperity, but rather it has impoverished the masses due to political interests, corruption and remarkable ineptitude by most of the political leadership.

Revenue from crude oil in the 1970s and 1980s became the mainstay of Nigeria’s economy that provided the key for the functional industrial and manufacturing sectors, which helped to boost local production and exports, thereby keeping the Naira almost at par with other world currencies.

The country’s agricultural sector was particularly an area to reckon with given the magnitude of cash crop export activities that took place during the golden era.
And almost every region of state of the federation were actively involved in the nation’s economic development – each having some level of competitive advantage in one or two export commodities.

But the rest is history today.The advent of oil and free money gave birth to laziness and leaders who lacked the capacity to sustain the nation’s economic greatness through systematic and structured plan to diversify the economy alongside oil potential.
Rather, oil was embraced as the cash cow of the moment and agriculture and other non-oil sectors of the economy were relegated to the background.

Fiscal Dilemma

Today, but for a few, all states of the federation are in fiscal dilemma because of their over-reliance on crude oil proceeds. But for the monthly oil proceeds being regularly distributed, no state is adjudged as being capable to survive on non-oil revenues, except Lagos.

For decades the promise to develop the regional economies had often been mere talk without action, as governors pay lip service to economic empowerment and job creation.

There had been instances where state chief executives with their entourage embarked on investment tours abroad with the promise to woo foreign investors to change the narratives in their various states but nothing tangible is recorded in that direction at the end of the day.

It is even on record that some state governors had boasted of attracting large supermarkets in their domain – as part of the gains from their tours abroad.
Yet unemployment and poverty remain the order of the day in many states.
Also, as a result of leadership ineptitude, apart from the civil service in every state, it is almost impossible to find multinational investments capable of generating the much-needed jobs to boost states’ economies.

Federation Account

The abysmal state of the sub-national economies was reflected recently in the 2021 edition of the State of States report by BudgIT, themed:“Fiscal Options for Building Back Better”.

The report alluded to the fact that currently only three states out of the 36 States of the federation can meet their operating expenses obligations with a combination of their Internally Generated Revenues (IGR) and Value Added Tax (VAT) without recourse to the federation account, a comparative viability study has shown.

These states included Lagos, Rivers, and Anambrawith Ebonyi and Cross River also ranked behind them.

However, Jigawa, Delta, Benue, Taraba and Bayelsa occupied the bottom of the ladder respectively as they were unable to boost their IGR within the review period.

The report however, stated that cumulatively, all 36 states witnessed a 3.43per cent decline in IGR from N1.26 trillion in 2019 to N1.21 trillion 2020.

It said while 18 states recorded a decline in their year-on-year IGR 18 others indicated their ability to weather the fiscal storm induced by the COVID-19 pandemic -growing their revenue in some cases by as much as 87.02 per cent.

It added that Lagos, despite being the epicentre of the pandemic, posted a 5.08 per cent growth in IGR, proving the resilience of its fiscal strategy.

It said Ebonyi and Kebbi became new entrants to the top five category in the overall ranking – with the former emerging in second position up from sixth in 2020, while the latter assumed the fifth rising from 11th in the preceding year.

According to the study, the subnational debt outlook indicated that states total debt burden increased by N472.63 billion or 8.78 per cent from N5.39 trillion in 2019 to N5.86 trillion in 2020.

It said the increase in total debt incurred by the states was largely driven by exchange rate volatility which saw the value of the naira jump from N305.9/$1 in 2019 to N380/$1 as at December 31st 2020.

It said Lagos, Kaduna, Edo, Cross River and Bauchi were significantly hit due to negative exposure to exchange rate volatility.

However, 11 states including Jigawa, Sokoto, Kogi, Ebonyi, Katsina, Yobe, Bayelsa, Ondo, Kebbi, Kwara and Nasarawa still had a comparatively low debt burden, adding that their debt profiles are so low they can theoretically pay it off in a single year, using their 2020 total revenue.

The report, nonetheless, said,”We note that a low debt burden in itself is not necessarily a good or a bad thing; however, these states are highlighted because they still have comparatively more leeway to borrow”.

“Thus, they need additional technical support to be more strategic in their future borrowing to ensure value for money,” the report added.

On the other hand, Cross River, Plateau, Imo, Adamawa and Bauchi were adjudged to be least attractive states going by their high debt burden when compared with their 2020 total revenue.

The BudgIT report said these states would need to “urgently develop Public-Private Partnership (PPP) models for financing expenditures in critical sectors, as their attractiveness to potential lenders is significantly reduced”.

The report also said Ebonyi, Rivers, Anambra and Cross River and Kaduna prioritised investment in infrastructure by spending more on capital expenditure than operating expenses while Benue, Kogi, and Taraba, among others lagged behind.

Improving IGR

The report said these states need to do more to rapidly consolidate on any ongoing strategies to improve their IGR and viability as federating entities.

This is particularly necessary considering the comparative size of their operating expenses and the global push to transition away from fossil fuels such as crude oil which is a key source of federally distributed revenue, the study pointer out.

In addition, the report noted that Rivers again topped the overall 2021 Fiscal Performance Ranking despite COVID-19 induced fiscal shocks to its IGR, indicating that the fiscal fundamentals of state, compared to other state are managed prudently.

The BudgIT report however, added that all Nigerian states still needed to work hard to build economic prosperity and create more jobs in their states to ensure that there is more money in circulation as well as economic activities that could be taxed to improve their IGR.

BudgIT Chief Executive, Mr. Gabriel Okeowo, said this year’s evaluation centered on states’ fiscal performance ranking as opposed to the sustainability index it had published in the past five years.

He said,”The reason for that is that we see that some states were carried away with the word sustainability and just went around saying they are sustainable.

“Our research is a contributory part of the whole and so it is not enough for states to say they are on the top of the table and doing well and needed no further improvement.Every state in Nigeria still needs to look inwards, even the top five states, or number one state. We are still saying that if the backbone support they have today – the allocations coming from the federal government goes down, it affects the states.”

“Yes, we know there are some states that are doing well and that are able to run themselves based on the internally generated revenue but beyond the IGR that is mostly driven by taxes paid, can we begin to see states go into production and go into avenues that also create jobs for people?”

He said some state might just be lucky to have been ranked top “not that there’s any serious systemic process that lead the states to whatever rank they occupy right now.”
He said the subnational governments should be systemic in their approach to build systems, structures that outlive their tenure.

Speaking at the occasion, Chief Executive, Nigerian Economic Summit Group (NESG), Mr. Laoye Jaiyeola, said the viability of states would depend on how well they are able to expand the fiscal resource space.

He said project prioritisation and sequencing through long to medium term planning was critical as an expenditure management strategy.

He said, “This helps to curtail the incidence of abandoned projects due to lack of funds and changes in government priorities.

“It is unthinkable that today, we still have states whose yearly budgets are not driven by well-developed planning frameworks such as medium term sector strategies and a medium term budget framework.

Among other things he said, improving fiscal discipline remained key if states must build back better.

“I am sure rethinking our budget practices at the subnational level is long overdue and now is the best time to act,” he said.

Huge Debt Burden

According to the BudgIT study, cumulatively, the 36 states total debt burden increased by N472.63 billion (or 8.78 per cent) from N5.39 trillion in 2019 to N5.86 trillion in 2020.

“This increase in total subnational debt was driven largely by exchange rate volatility which saw the value of the naira jump from N305.9/$1 in 2019 to N380/$1 as at December 31st 2020.

“States with the highest foreign debt were significantly hit due to negative exposure to exchange rate volatility.

“These states include: Lagos, Kaduna, Edo, Cross River and Bauchi (See the datasheet on 2020 Foreign Debt by state).

“Furthermore, five states accounted for more than half (that is 63.63 per cent or N300.7 billion) of the net year-on-year subnational debt increase of N472.63 billion for all the states between 2019 and 2020: the states are Lagos, Kaduna, Anambra, Benue and Zamfara.”

Way forward

The study noted that for States to make headway in the current scenario, they must tackle corruption and address revenue leakages.

The report stated that “without a doubt, COVID-19 ravaged the revenues of many Nigerian state governments and the need to explore options for ‘building back better’ cannot be overstressed.
“A critical first step for states would be to rapidly block financial leakages that could further drain the little available revenue or future revenue. From the Annual Performance Assessment (APA) results of states under the State Fiscal Transparency, Accountability And Sustainability (SFTAS) program, released in Q2 2021, only seven states in Nigeria had functioning Treasury Single Accounts (TSA), an otherwise critical fiscal strategy that gives states more control over their revenues and could help states reduce leakages.

“The results were better for states that had introduced reforms to block leakages, due to the existence of “ghost workers” and other forms of payroll fraud. About 24 states and 27 states respectively, had introduced “Biometric use in payroll management” and “Bank verification number use in payroll management”.