Business
Parlous state of state’s finances worsen
How states can survive –World Bank
By UCHE CHRIS
From every indication, the next four years will be testing and tough for most Nigerians but particularly state governments. In the past four years of this government, the states had their hands full and few of them could raise their heads above water as the rest drowned in the ocean of troubles. President Buhari gave indication of this fact recently shortly after winning a second term.
Given that the country went through an 15 months recession, most state government could barely survive as revenue plunged, projects abandoned and backlog of workers’ salaries mounted. At a point some states such as Osun, Benue, Imo, Kogi, Edo etc owed over six months of salaries. It was the release of the Paris Club refund by President Buhari to the states for budget support that cushion that crushing effects of the recession on states’ revenues.
President Buhari was mainly responsible for saving most of the governors from the anger of the people and creating a measure of industrial peace during the past four years as he regularly intervened to bail out the distressed states at critical moments. Indeed, a N120 billion subvention from the Central Bank of Nigeria to assist the states was Buhari’s first major policy action after taking office as the new governors cried out for help. He intervened several times in the first term to rescue the states which essentially ensured his popular image among the governors of fatherly benevolence.
However, the tide seems to have changed as the president warned that the second term will not be business as usual as tough decisions have to be made to save the economy. Normally, most of the states depend on the federal allocations for their budgetary provisions and any reduction in government revenues have direct adverse impact on the revenues of states.
For instance, the revenue for the month of March dropped by over N28 billion from that of February, which signposts some challenges for the states.
Apart from Lagos state, and Rivers to an extent, no other state in the country has any meaningful contributions from their internally generated revenue, IGR. Lagos makes about N40 billion monthly followed by Ogun and Rivers with about N15 and N12 billion.
Government revenue faces serious threats from both internal and external sources which may worsen the conditions in the states. At present most of the states are still in arrears of salaries; pensions have practically been forgotten except perhaps in Lagos – even here there are cries of neglect; and the implementation of the new minimum wage, which the governors had opposed before succumbing to the president to guarantee reelection.
But with the election over implementing the wage hike will determine the future of the governors and even the states. It was learnt that increase in VAT and hike in fuel prices were potential sources of revenue anticipated to cushion its effects. However, opposition to VAT hike for instance by labour has remained fierce and uncompromising.
Just last weekend, the national leader of the APC, Asiwaju Ahmed Bola Tinubu, warned the government to shelve the idea and proposal to save the government. Tinubu spoke at the 11thcolloquim in his honour. Tinubu warned that government was elected to serve the people and not impose hardship on them. As it stands, the viability of the VAT option is still doubtful leaving the fate of states hanging in the balance.
To compound the problem is the growing short-fall in the country’s output from the budget benchmark of 2.3 million barrels per day, mbpd, to about 1.8 mbpd, which incidentally is OPEC quota for the country. Although the price is still above the benchmark at $66 per barrel, the drop in output; the bench mark is $60 per barrel.
President Buhari had told his ministers that the new four-year mandate given to his administration by Nigerians will be tough as he pursues his campaign promises of securing the country, transforming the economy and the fight against corruption.
Buhari was declared re-elected, having polled 15,191,847 votes, winning in 19 states, to defeat other 72 candidates including Atiku Abubakar, the candidate of the Peoples Democratic Party who scored 11, 255,978 votes.
The President said: “My last lap of four years I think is going to be tough because people are very forgetful – that was why, wherever I went, I reminded them of the campaign by our party of the three fundamental issues – security, because you have to secure a country or an institution to manage it properly.
“If you don’t secure it, you can’t manage it, no matter how much propaganda you put in place. Secondly, the economy, the unemployed able-bodied are the problem of this country as a whole – more than 60 per cent are youths – that means 35 years and below – they need to be kept busy.
Mr.Teslim Shitta-Bey of Proshare, says the states could not be a worse condition given that revenue is declining and costs are rising.
“Most of the states including Lagos are in big trouble; the minimum wage if eventually implemented will force some of them into bankruptcy. Their IGR is low, they are barred from direct short term borrowing from banks unlike before because of the Fiscal Responsibility Act; their FAAC is being deducted for the budget support interventions to pay salaries, and they are already reeling under heavy debt burden”.
For instance, Ogun state had N12.4 billion deducted from its FAAC in 2018, which is a major dent on its revenue. Other states are also in similar condition as a result of the bond the received from the CBN to pay salaries. In fact Lagos is even in worse situation in view of its revenue to debt ratio; the only consolation is the size of its economy and the ability to generate huge IGR.
Debt status of the States
Most of the states’ debts exceeded 50 per cent of their annual revenues. The debt profiles of about 18 states exceed their gross and net revenues by more than 200 per cent.
Lagos, Osun and Cross River states record over 480 per cent debt to gross revenue. The Fiscal Responsibility Commission, FRC, stated this in its 2016 Annual Report.FRC said the development was contrary to the guidelines of the Debt Management Office on debt sustainability.
The guidelines said that the debt status of each state should not exceed 50 per cent of the statutory revenue in the previous 12 months.
The report stated, “In the light of the DMO’s guidelines on the Debt Management Framework, specifically, sections 222 to 273 of the Investment and Securities Act, 2007 pertaining to debt sustainability, the debt to income ratio of states should not exceed 50 per cent of the statutory revenue for the preceding 12 months.”
Commenting on the portion of states’ debt, Oniha said they were permitted to apply 40 per cent of their revenue for debt servicing and operating with the remaining 60 percent. An analysis presented in the FRC report, however, showed that most states flouted the directive.
In fact, the debt status of many states exceeded the debt to revenue ratio by more than 100 per cent. The analysis was based on the debt profile of the states as of December 31, 2016.
The states with the highest debt to gross revenue ratios were Lagos (670.42 per cent), Osun (539.25 per cent), Cross River (486.49 per cent), Plateau (342.01 per cent), Oyo (339.56 per cent), Ekiti (339.34 per cent), Ogun (329.47 per cent), Kaduna (297.26 per cent) and Imo (292.82 per cent).
Others were Edo (270.8 per cent), Adamawa (261.96 per cent), Delta (259.63 per cent), Bauchi (250.75 per cent), Nasarawa (250.36 per cent), Kogi (221.92 per cent), Enugu (207.49 per cent), Zamfara (204.91 per cent), and Kano (202.61 per cent).
The debt to net revenue ratio of the states put some of the states in even more precarious situations. The debt to net revenue of Lagos, for instance, is 930.96 per cent, while that of Cross River is 940.64 per cent.
The only states whose debt did not exceed the 50 per cent ratio by more than 100 per cent are Anambra, Borno, Jigawa, Kebbi, Sokoto, Yobe and the Federal Capital Territory.The debt to revenue ratio is very important in debt analysis as it can give an indication of the capacity of the debtor to service and repay the debt.
However, the FRC noted that it should not be concluded that a state had over-borrowed because its debt to revenue ratio was more than 50 per cent.
“It should be noted that the fact that some states exceeded the threshold of 50 per cent of their total revenue is not an indication that they over-borrowed as the debt limits of the governments in the federation are yet to be set.
“Furthermore, only total revenue is used for the foregoing analysis as comprehensive data on the states’ Internally Generated Revenue were not available. In any case, the IGR on the average is not more than eight per cent of the states’ total revenue except for Lagos State. In essence, the non-inclusion of the IGR may not distort the result of the analysis.
“Therefore, there is a need for each of these states to work towards bringing their respective consolidated debts within the 50 per cent threshold of their total revenue in order to guarantee public debt sustainability in the country.”
The cost of debt servicing is very high. So, all the resources they are supposed to provide roads, schools, hospitals and take care of the citizens, a huge chunk of that goes to debt serving. Just as they are spending huge money on subsidy, all those things are depriving the common people of more important things.
In the 2018 budget for instance, N2 trillion was earmarked for debt servicing. And we had N2.5 trillion for capital expenditure. You can’t continue to run an economy that way. And you don’t anything to show for the debt.”
Dr. Boniface Chizea, CEO, BIC- Consultancy asserts that rising debt is only bad when it has been acquired not judiciously; not invested in self liquidating Capital projects and particularly when the debt has been consumed or looted.
“The future of the economy is mortgage and shortchanged. This is inherent creating such situation as inter generation inequity. It impoverishes future generations as income is applied to meeting future debt obligations at the expense of other pressing developmental challenges undermining the development potential of the country.”
