Lagos State Budget 2021: Rekindling Hope, Riding Expectations

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Sunday, January 17, 2021   /09:00 AM / By Proshare Research/ Header Image Credit: @followlasg

 

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At a media briefing held on Thursday, January 14, 2020, the Lagos State Government gave a breakdown of its 2021 budget which it called a 'Budget of Rekindled Hope'. The heart of the budget leveraged its THEMES agenda that encapsulated the broad socioeconomic goals of the administration.

 

A review of the government's 2021 plan showed a mixture of audacity, brilliance, and a dash of hubris. The budget deficit finance plan shows the government's preparedness to take on more debt in 2021, this may not have been unexpected. The state's huge infrastructure gaps and social security needs explain the charge towards larger debt commitments, the state's debt service ratio is expected to rise from roughly 19% in 2020 to about 22% in 2021. Nevertheless, the broad sweep of the budget points to capital expenditure aimed at improving the quality of citizen's lives with a capital to recurrent expenditure ratio of 60% to 40%.

 

The budget put under a analytical microscope appears as below:

 

Lagos in a Snapshot

Lagos is Nigeria's most densely populated state with a landmass of 3,577 square kilometres and an estimated population of 14.86m people (United Nation's projections for 2021).

 

Illustration 1: Lagos State's Growing Population

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However, the state remains the most commercially vibrant and economically sustainable state in the federation. The state generates the country's largest value-added tax (VAT) revenue with a total revenue of N96.26bn between January and October 2020. The state's total internally generated revenue (IGR) was N204.51bn as of H1 (i.e., January to June) 2020. Its federation account allocation committee (FAAC) revenue was N149.89bn as of October 2020. Available data shows that the state depends more on its internal revenue sources than its federal allocations which points to strong internal fiscal stability and higher thresholds for fiscal shocks. A snapshot of the state's finances (see Illustration 2 below) tells a compelling story of fiscal strength, diversity, and resilience.

 

Illustration 2: A Snapshot of Lagos Finances

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Lagos State total revenue (October 2020) which includes VAT, IGR, and Net FAAC Allocation, increased by +8.81% to N149.89bn in 2020 (January - October 2020) against N137.76bn in the same period of 2019.

 

Its net FAAC allocation grew by +7.55% Y-o-Y while VAT allocation significantly grew Y-o-Y by +20.55%. Its internally generated revenue (IGR) as of H1 2020 declined by -0.32% to N204.51bn in H1 2020 from N205.17bn in H1 2019 (see Chart 1 below).

 


 

Chart 1: Lagos State FAAC 2019 - Oct 2020 (N'bn)

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Source: NBS, Proshare Research

 

Lagos budget revenue has been on a steady path of growth for the past three years. Its revenue proposed for the Y2021 budget increased by +19.58% to N971.03bn from N812bn for the Y2020 budget (see Chart 2 below).

 

Chart 2: Lagos State Budget Revenue 2016 - 2021 (N'bn)

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Source: Lagos State Government, BudgiT, Proshare Research


The budget size of the commercial hub has been fairly on the increase over the years. However, in 2019, the budget size declined significantly by -16.50% Y-o-Y.  Furthermore, Y2020 budget which was revised based on the economic realities caused by the COVID-19 increased slightly over +5% Y-o-Y. Y2021 "Budget of Rekindled Hope" increased significantly by +26.52% Y-o-Y to N1.16trn from N920bn in 2020. Its capital expenditure increased by +38.65% while its recurrent expenditure increased by +11.52% (see Chart 3 below).

 

Chart 3: Lagos State Budget Size 2016 - 2021 (N'bn)

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Source: Lagos State Government, BudgiT, Proshare Research

 

Lagos State Budget in US Dollars

In US dollar terms, the Y2021 budget increased marginally by +1.93% Y-o-Y to $3.06bn from $3.0bn in Y2020 (using the official CBN rates as of the different periods). The marginal growth in the budget size was driven by a +11.70% Y-o-Y increase in capital expenditure while recurrent expenditure declined by -10.15%. This decline is a result of the devaluation of the domestic currency (see Chart 4 below).

 

Chart 4: Lagos State Budget Size 2016 - 2021 in USD Terms

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Source: BudgiT, Proshare Research

 

Of Dollars and Lagos State IGR

Businesses and revenue lines of the State declined significantly in Q2 2020 which was the peak of the COVID-19 induced lockdowns and restrictions. IGR declined by -20.6% in Q2 2020, from N114.0bn in Q1 2020 to N90.51bn in Q2 2020. This was majorly driven by an over -30% decline in road taxes and direct assessments in Q2 2020. Other taxes segment of the IGR recorded an +11.15% growth in revenue Q-o-Q.

 

Converting to US $ terms, IGR declined even more by -28.16% Q-o-Q to $250.73m in Q2 2020 from $349.02m in Q1 2020 (official CBN rates were used for the different periods). Direct assessment and road taxes were major drivers in the decline of IGR. They both declined by over -44% Q-o-Q while other taxes segment recorded a marginal growth of +0.57%. The huge decline in US $ Terms is a result of the devaluation of the domestic currency (see Chart 5 below).

 

Chart 5: Lagos State IGR in US $ Terms 2019 - Q2 2020 ($'m)

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Source: BudgiT, CBN, Proshare Research

 

IGR per capita in US $ terms declined by -28.16% in Q2 2020, from $24.29 in Q1 2020 to $17.45 in Q2 2020. This is the lowest it has been in over five quarters. However, in Naira terms, IGR per capita declined by -20.6% in Q2 2020 to N6,299.57 (see Chart 6 below).

 

Chart 6: Lagos State IGR per capita 2019 - Q2 2020 ($)

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Source: BudgiT, CBN, Proshare Research

 

The Debt-to-Revenue Conundrum

Over the last four (4) years, Lagos State has recorded one of the highest internally generated revenues (IGRs) compared to other states in the country. However, the uptick in the state's IGR has been accompanied by other concerns, such as the towering size of the state's public debt. Lagos State's total public debt as of 2019 was N872.63bn while its revenue for the year was N516.62bn. In the last few years, the state has disregarded guidelines of the national Debt Management Office (DMO) by taking on debts that exceed 50% of its previous 12-month revenues. Although the state's debt-to-revenue ratio fell in 2019, its total public debt exceeded its total revenue by 168.91%. The continuous increase in the state's debt-to-total revenue ratio mau pose a problem for intergenerational fiscal stability, even though the alarm bells are not sounding yet (see Table 1).

 

 

Table 1: Lagos State Debt to Revenue Ratio

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Lagos State Budget 2020: Looking Back in Satisfaction

Despite a debt overhang the state's THEMES agenda appears alive and well and forms the hub of its bright and shiny budget 2021.

 

The THEMES project of the government appears to serve as the budgets operational anchor designed to push the vision of the administration to achieve the following:

T- improved traffic and transportation in the state through improved road infrastructure and increased bus rolling stock and transport service upgrade. In 2020 the state government budgeted N49.15bn for transportation with expectations that this would ease the traffic gridlocks that have characterized movement in the state. Unfortunately, despite the budget for the sector, transportation in 2020 remained a principal point of pain for businesses and citizens.

 

H- scaling-up the quality of healthcare service delivery with priority placed on preventive healthcare action such as through improving the quality of the environment of citizens. The budget allocation to the healthcare sector was N97.3bn in 2020, the budget was quickly disrupted as the emergence of the COVID-19 pandemic raised the cost of health coverage astronomically. Despite the challenges, Lagos State appears to have responded decisively to contain the pandemic and manage non-pandemic-related health matters. However, with the state still being the epicentre of the COVID-19 pandemic in Nigeria, the state will need to spend larger sums on healthcare advocacy, virus management protocol/enforcement, and vaccine distribution logistics at the appropriate time.

 

E- pushing the frontiers of education and technology with priority given to science, technology, engineering, and mathematics (STEM). The state spent N108.34bn on education in 2020, but this was far less than what was needed if the state needed to create and support a modern economy of the government's vision. However, the march towards upgrading the state's economy must occur in simple but decisive steps. Education in the state requires major investment involving a large amount of private sector participation (PSP). The state needs to align the training of its future labour force to the needs of its desired and not retired economy, this may require that the state thinks outside its traditional service delivery box and supports study programmes that allow students to acquire knowledge that is fit-for-purpose for prospective job markets (see Illustration 3 below).

 

 

Illustration 3: The Shifting Realities of The Local Job Market

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M- engineering a modern 21st-century economy has been a key component of the state government's agenda and has become a recurring goal of its respective budgets. The budget for 2020 was no different with a target of upgrading critical socioeconomic infrastructure to global best standards and running the state with an eye on international competitiveness. The race to modernity was captured in the web of expenditures on key budgetary item heads ranging from infrastructure to education and security. The state spent a total of N122.7bn on infrastructure in 2020.

 

E- Lagos has a clear competitive advantage in being Nigeria's conference technology and entertainment hub. However, success in these areas would require heavy private sector capital investment supported by the state government's support through tax reliefs and in some cases partial equity support or tax rebates. In 2020 not much growth was witnessed in these sectors because of COVID-19 pandemic-related problems. However, in a post- coronavirus world, perhaps from 2021, the state may need to put a fire under the bed to wake the technology and entertainment sectors while ensuring a cleaner and more supportive environment for people and enterprises to thrive. The state's budget for tourism, arts, recreation, culture, and religion was N12.33bn in 2020. The issue was less a matter of how money was spent as it was one of where it was spent. Like several states in Nigeria, post-intervention reports rarely accompany annual budget statements, therefore, making expenditure impact assessment difficult.

 

S- Providing best-in-class security architecture to support a 24-hour economy. On public order and safety, the state spent N36.64bn which represented 3.98% of the revised annual budget for the year 2020. Security continues to be an important budget item for the state as the limitations in the present security architecture has stalled the state's ability to progress to a 24-hour economy. An improvement in the state's security framework and execution could see a major expansion in both the state's night economy and its blue economy.

 

 

Illustration 4: Lagos State's 5 Pillars of Budgeting

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Lagos State Budget 2021: Looking Forward with Hope

The state's 2021 budget like its 2020 counterpart leveraged the THEMES vision. The broad outline of the 2021 budget showed that the state budgeted a total expenditure of N1.16trn and total revenue of N971.03trn, leaving a budget deficit of N192.49bn. 

 

 

Illustration 5: LASG Revenue 2021

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In a period of large business disruptions that resulted in supply chain challenges that rode on the COVID-19 pandemic and the need to lock down the state's economy for three months in 2020, the raising of the state's budgetary triggers to expand economic activities to support lives and livelihoods is understandable.

 

 

Illustration 6: LASG Expenditure 2021

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In 2021 the state expects to spend N167.80bn in infrastructure, N146.94bn in education, and N106.09bn in health. The three sectors represent roughly a third of the state's total budget allocation for the year. The fourth-largest budget head is transportation at N92.75bn. The budgetary allocations mirror trends in the previous year's budget.

 

 

Chart 7: LASG 2021 Budgetary Allocation

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THEMES 2021: Thinking with Expectations and Working for Improved Outcomes

The THEMES agenda is sufficiently comprehensive to meet the expectations of Lagosians but requires a recognizable and quantifiable roadmap. Indeed, THEMES must be SMART. The agenda requires specific projects and programs to be included in a publicly available execution chart, the outcomes of expenditure must be measurable by way of an annual post-intervention report to accompany annual budgets. The goals of the agenda need to be achievable and so they must be broken down into executable action timelines. The budget requirements would rest on how realistic expectations were when the budget assumptions were put together. In other words, the budget 2021 goals must be monitored with appropriate adjustments made after quarterly reassessments. Timelines may shift but these must be exceptions rather than the rule. Binding budgetary execution to publicized timelines would ensure a neater implementation framework for the budget and give Lagosians greater confidence in the budgetary process and the need to play their roles by way of taxes and levies, thereby establishing social trust/contract. 

 

The THEMES six pillars of development addresses concern at the heart of Lagos development. These pillars once achieved can help trigger tremendous growth of the Lagos economy. The priority sectors of the Lagos economy recorded an increase in budget allocation in 2021 e.g., there was an increase in health sector allocation by +9.03%. Despite these increases, the performance of the Lagos state budget is predicated on how well it can manage the rapid spread of coronavirus and strengthen its revenue drive. An increase in the number of incidences might force the Lagos government to enforce a lockdown, which will affect its revenue drive. On the other hand, proper management of the pandemic will make its revenue drive realistic. Also, Lagos state would need to block leakages to strengthen its revenue and expenditure drive.  As a principle of life, goals, and plans not accompanied by the requisite action would amount to building castles in the air. Therefore, the government must halt the further spread of the virus.

 

Lagos state should place more emphasis on budget impact in 2021. It is not sufficient for the budget to be implemented without attention to the impact of budget spending. The government must ensure that there is transparency as regards; project's true cost, benefits and cost of the project, economic value of the projects and programs, and demography of the citizens that would benefit from the project.

 

To address human capital problems, boost literacy and productivity, a total of N146.93bn was allocated to the education sector. Although this is commendable, it is pertinent to point out that having a productive education sector that can drive productivity would mean a major overhaul of the Lagos state education curriculum. Lagos, the commercial hub for West Africa can attract more investment when it empowers its citizens through investment in education. The government should intensify its focus on a curriculum that emphasis on STEM (Science, Technology, Engineering, and Mathematics). It has been proven that economies that focus on STEM tend to have a rapid rate of development in their economy. Furthermore, tutors and lecturers should be trained in line with a modern STEM curriculum to make students more competitive.

 

Health and the environment are major components of Lagos THEMES six pillars of development. The breakdown of the state's budget for 2021 reveals that over N106.09bn was allocated to the health sector. Although this is an improvement in allocation when compared to the previous year, challenges, as regards the rapid spread of the coronavirus, remains a major hindrance to its health objective. Given the present state of healthcare facilities in Lagos, a continuous spread of the coronavirus will pose a major challenge in 2021. The Lagos state government is faced with the difficult decision of choosing between lives and livelihoods. Lagos state presently has the highest incidence of coronavirus cases in Nigeria. Despite its increased level of sensitization of wearing a mask and social distancing, there has been a high disregard for these rules as people are consistently flouting these rules. Therefore, the pandemic would create additional pressures on healthcare and might call for a supplementary budget to be passed to cater for an increase in the spread of the virus.

 

Finally, the major bane of Lagos state budget performance and attaining the THEMES objective in 2021 will be the continuous spread of the virus. An increase in the number of cases will put additional pressure on healthcare facilities and trigger a fresh lockdown. A lockdown will further disrupt the education curriculum and reduce economic activities e.g., a decline in activities in the entertainment and tourism sector, financial services, manufacturing, etc. Hence, the drive for full budget performance should coincide with intensified efforts in preventing the spread of the virus.

 

Lagos in A Heartbeat

Budgeting is a complex exercise and in a state like Lagos it could be exponentially more difficult. However, budgets like many institutional tools of management, represent templates and what seems critical in state budgets is that the parameters and assumptions of the templates are SMART.

 

Lagos is the heartbeat of the commercial economy of Nigeria, and therefore, managing the state's resources comes with a myriad of issues, hence making budget 2021 achievable requires sound templates, robust but flexible assumptions and a commitment to execution.


 

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