BY EMEKA EJERE
The 36 states of the federation will have to work extra hard to boost their internally generated revenues (IGRs) for them to live up to their financial obligations in the fiscal year 2022.
In a very likely event of the National Assembly approving an additional request of N2.5 trillion by the federal government to fund petrol subsidy for the year, states and local governments will have to part with about N1 trillion as their own contribution.
President Muhammadu Buhari, had in a letter to the National Assembly last week said the federation account, which belongs to the three tiers of government will reduce by N2 billion as the federation will spend N2.5 billion on petroleum subsidy.
Out of the N2 trillion, the federal government will bear N1.05 trillion, leaving states and local governments to bear N985 billion of the cost for subsidy.
The federal government had planned to stop the subsidy regime by June 2022. But in a move widely seen as a political strategy, it backtracked on the plan, saying the proposed removal of fuel subsidy would be extended by 18 months, adding that the development meant the PIA would be reviewed and sent to the National Assembly.
Special Adviser to the President on Media and Publicity, Femi Adesina, while speaking on the subsidy withdrawal postponement said Nigeria would have to pay a price for the government’s decision to retain the fuel subsidy regime, noting that the country may have to continue borrowing to meet its obligations.
On the financial cost of the 18-month extension for subsidy removal, Adesina had said, “Head or tail, Nigeria will have to pay a price; it is either we pay the price for the removal in consonance and in conjunction with the understanding of the people.
“The other cost is that borrowings may continue and things may be difficult fiscally for both the state and the federal government. You know how much could have been saved if the subsidy was removed and how it could have been diverted to other spheres of our lives…we have to pay a price.”
This is coming at a time the states are yet to know their fate as the Federal High Court, in Abuja, has fixed March 25, 2022, for judgment in a suit by the 36 states governments against the federal government’s plan to deduct $418 million from their funds to settle debts owed consultants engaged by the states and councils in relation to the Paris Club refund.
The debts had accrued from court judgments awarding the creditors, who claimed to be consultants and contractors to the states and local governments, various sums of money which currently stand at $418 million.
It is also a time the states are grappling with the reality of the Central Bank of Nigeria (CBN) commencing deductions on the $2.1 billion budget support facility that was granted to them (the states) by the federal government.
However, all of the 36 states in the country are expected to get N18.2 billion each from a fresh N656 billion bridge financing facility that was approved in November 2021 by President Buhari. The fund is expected to help the state governments meet financial obligations, especially the previous budget support facility due for repayment.
This was disclosed at the 121st (10th in 2021) National Executive Council’s (NEC) meeting, which was held virtually and was presided over by Vice President Yemi Osinbajo, with state governors, Federal Ministers, the CBN Governor, and other senior government officials in attendance.
According to a statement by the Senior Special Assistant to the President on Media & Publicity, Office of the Vice President, Laolu Akande, the Minister of Finance Budget and National Planning, Dr. Zainab Ahmed, informed the Council that the bridge facility, which was being processed by the CBN, would be disbursed in six tranches over a period of six months to the states.
Each of the 36 states would have a total loan amount of N18.225 billion; with a 30-year tenor, and a 2-year moratorium at an interest rate of nine percent.
“The facility is to help the states afford the repayment of previous bailout facilities guaranteed for them by the federal government,” it added.
The Council had July 15, 2021, received updates on the budget support facility to states. At that meeting, the Finance Minister had informed the council that the deductions from state governments would commence as soon as repayment for the previous bailout from the CBN. Subsequently, the states sought further support leading to the idea of bridge financing.
The federal government through the CBN between 2015 and 2016 provided budget support facilities to the various state governments in the wake of the economic crisis with most of them unable to pay the salaries of their workers. The States had been lobbying for deferment of payment until when Edo State Governor,Godwin Obaseki,
accused the apex bank of printing naira to shore up the shortfall.
However, in April 2021, the CBN Governor, Godwin Emefiele, in reaction to claims by Obaseki that the federal government had printed an additional N60 billion to augment allocations to the state governments, demanded the repayment of the facility.
Emefiele who denied Obaseki’s claim said it was time for states to start repayment of the facility since some of them are now accusing the apex bank of giving them loans. The state governors lobbied again to extend the time while Emefiele insisted. This led to the issue being referred to NEC for intervention.
Dwindling Revenue
The state governments rely on internally generated revenues (IGRs) and the Federation Accounts Allocation Committee (FAAC) for funding. The shortfall is bridged with loans sourced from both external and domestic sources.
While government financial obligations have increased remarkably, IGRs and FAAC have rather nosedived after COVID-19 and other structural challenges took their toll on economic activities.
In 2020, IGRs of states declined, albeit moderately, from N1.33 trillion to N1.3 trillion. Yet, the contribution of revenues from ministries, departments and agencies (MDAs) was less than 20 per cent of the total sum, while taxation took a chunk of the returns.
This has forced states to revert to the debt market for immediate lifeline, a culture analysts describe as postponing the evil days.
Traditionally, only Lagos, Rivers and Ogun states meet 50 per cent of their revenue from IGRs while some states get as much as 80 per cent of their revenues from the federation accounts. In 2020, for instance, IGRs amounted to only 36 per cent of the N3.6 trillion total revenues accrued to states for spending.
Amid growing liquidity crisis, findings have suggested that many state governors are queuing for commercial loans to offset “spending plans and schedules” that cannot wait. This is raising dust in the financial circle, as it would increase the already high banks’ exposure to governments.
“The states are broke, and there is not much on the table to shore up their finances in the next one to two years. This should worry any prospective lender. We only hope the government will not expose the banks to financial risks. Unfortunately, some of the bank chiefs do not know how to say no to the states’ request because of their subtle blackmail,” a source who is privy to ongoing negotiation for commercial loans told Business Hallmark.
In December, the Debt Management Office (DMO) disclosed that Nigeria’s Public Debt was N38.005tn by third quarter of 2021. In a press statement titled ‘DMO publishes total public debt for Q3 2021,’ it said:
“In line with its practice, the Debt Management Office has published Nigeria’s Total Public Debt as at September 30, 2021. The Data which includes the Total External and Domestic Debts of the Federal Government of Nigeria, thirty-six State Governments and the Federal Capital Territory, shows that Nigeria’s Public Debt was N38.005tn or $92.626bn at the end of Q3 2021.”
At the close of 2020, the states and FCT owed N1.8 trillion as foreign debt and N4.1 trillion as domestic debt, whereas the total revenue (from FAAC and IGRs) was N3.6 trillion, putting the debt to IGRs of the states at 460 per cent just as debt to total revenue is 170 per cent.
Dr. Chiwuike Uba, a development economist and chairman of the board of Amaka Chikwuike-Uba Foundation (ACUF), said it was practically impossible for any of the states to fully repay its debts in the next 50 years and that it was unfortunate that “states are still contracting more debts, despite their inability to repay existing debts.
“All the states are still having deficit budgets, which entails the accumulation of additional debts to fund current period expenses and other obligations. The minimum debt/IGR ratio for the state is 88 per cent and that is FCT in the year 2020″, he said.
“Despite their huge IGR potentials, the debt/IGR ratio for Lagos and Rivers states as of December 31, 2020 were 249 per cent and 259 per cent respectively.”
The debt to IGRs ratio is worst for states like Imo with 1093 per cent, Bauchi (1232 per cent), Benue (1323 per cent), Bayelsa (1380 per cent), Taraba (1434 per cent), Ekiti (1421 per cent), Cross River 1460 (per cent), Adamawa (1686 per cent) and Gombe (1852 per cent).
On his part, the Executive Vice Chairman of Highcap Securities Limited, Mr. David Adonri, admitted that debt finance was a necessary component of public finance, but cautioned that debt is very risky because failure to repay as at when due can lead to litigation and foreclosure.”
He warned lenders to ensure proper due diligence with a view to ascertaining the repayment capacity of each state before advancing more credits. “The Houses of Assembly must be alive to their responsibilities of scrutinising borrowing plans of their states and setting debt limits,” he advised.
