States are gloating over their good fortune of being granted what has increasingly been labelled a ‘bail out’. Indeed in ominous hint of the new Presidency’s disposition towards fiscal profligacy the vice president, Yemi Osinbanjo, was quoted in the media to have praised President Muhammadu Buhari’s magnanimity in granting approval for the ‘creative’ resolution of the fiscal headaches of several of the states with very untidy books.
The vice president’s oohing is politically understandable but technically underhanded; indeed it is a crackerjack economic gamble.  Reflating the economy at a time of recession makes good sense, if you belong to that strand of the Keynesian school of thought that believes that in the short term an economy is not self-correcting and therefore needs a nudge from government to push it along the right course and in the right direction, but for the push to be meaningful and non-inflationary it should be tied to productive activities that would grow both incomes and investment spending.
Unfortunately the bailout of notoriously spendthrift state governments does not fall into this neat category of productive fiscal stimulus. Restructuring workers, salary arrears and bundling them into long term debt instruments solves the immediate problem of paying workers’ salaries pass due but shift the burden of repayment on the same citizens or a fresh crop of citizens in the future. The scenario is quite simple. A bond must be tied to some source of repayment, in this instance it is (or at least should be) the state governments monthly revenue. A sinking fund is created and the state government repays the bond on a semi-annual (twice yearly basis) for the twenty years the bond is in existence.
Obviously to a large extent what the bond has done is to replace a short term debt with a debt of a longer term nature. The debt would be paid out of the state governments monthly income streams, the dwindling nature of which had been the cause of the original problem! A further challenge is that the bond forces a younger generation of workers to pay for the sins of a much earlier government that refused to reorder its fiscal priorities to fit the realities of declining revenues. This places a budgetary garrotte around the neck of future administrations and leaves them with less money to deploy in the building up of social capital like schools, hospitals and roads.
In other words, the Buhari bailout plan rewards existing state governments for poor fiscal habits and makes a fine mockery of the president’s reputation for prudence and discipline. Cheap bailouts are a terrible way of helping states work out their fiscal troubles. If states must be assisted, such assistance must be contingent on a workable and detailed fiscal restructuring programme.
The states must be tied to specific budgetary covenants that ensure that they do not embark on crass white elephant projects and that they maintain a targeted ratio of recurrent expenditure to total actual monthly revenues. The states must also be required to pay a competitive coupon rate on the bonds that they raise.
To ensure discipline in the use of the proceeds of the bonds, the bond receipts should be staggered into quarterly disbursements only after verification of previous fund application. In a situation where a state diverts the money received through the bond the future disbursements could be cancelled or delayed until the state reverts to the original terms of the bond.
The president’s ‘get-out-of jail-free’ card of N300 million proposed for states will be followed by tighter monetary policy arrangements to rein in potential inflationary consequences of the disbursements.  As can be expected this would lead to higher domestic interest rates and slower manufacturing and retail sector growth. Like the bogey spirit called Satan, what the bond gives with one hand it takes with another.
How about paying off the various states niggling commercial loans? This is equally problematic. Paying off the loans does wonders for banking sector liquidity, but it also involves the Federal Government in helping states refinance corruption embedded in dodgy contracts, flotilla of ghost workers, and a wondrous raft of sleaze built into public projects.
Rewarding states for bad behaviour is a concept that rankles at the mind. State governments need to be told in clear terms that they would not be given freebies and hand-outs on a platter in times of trouble. The citizens of their states elected the governors to solve problems, harness resources and chart paths of sustained development. State bosses were elected based on an inherent understanding that they have the intelligence, experience and temperament to pull their respective states along scraggly paths of growth. Nobody expected that the job would be easy, but then again, nobody compelled the cry baby governors and their lieutenants to take up the jobs if they could not hack it.
State governments’ sins have been many and gross, but with the recent open-ended federal fiscal bail-outs, we can expect many more; it is simple human nature.


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