Tuesday, September 29, 2020 / 01:45 PM / By
Proshare Research / Header Image Credit: EcoGraphics
Being the Keynote Address delivered
by Mr. Teslim Shitta-Bey, Chief Economist & Managing Editor of Proshare on
behalf of Mr. Olufemi Awoyemi, Founder/Chairman of Proshare at the BudgIT 2020
State of States Presentation which held on Thursday, September 23, 2020, at
Radisson Blu Hotel, Isaac John, Ikeja, Lagos State, Nigeria.
"Fiscal conservatism is just an easy way to
express something that is a bit more difficult, which is that the size and
scope of government, and really the size and scope of politics in our lives,
has grown uncomfortable, unwieldy, intrusive and inefficient". -P.J.O'Rourke
The
trouble with state finances today is not the challenge of revenue decline, low
capital expenditure and annual recurrent cost increases, these issues are taken
as given and represent recurring constants in the government's equation of
fiscal management. Indeed, these issues are junior to the bigger problems of imagination,
strategy and execution. Every great human endeavour is a product
of a mind or a collection of minds committed to thinking beyond the ordinary, a
mind or collection of minds prepared to tackle ordinary problems in
extraordinary ways. If states must navigate past the problem of the novel
coronavirus pandemic (COVID-19) and its multiple socioeconomic challenges, they
must begin to see the big picture as they prepare for fiscal resets and economic
realignments. States must begin to adopt fiscal frameworks primed to grow the
economy of tomorrow and not the economy of yesterday. We note that governance
is not easy but it is also not rocket science. For a government to be
successful in a period of a global trade and health crisis it cannot afford to
be stuck with the issues of yesterday, it must be prepared to address the
issues of the future because the future is here.
We
must begin to understand and appreciate the importance of the principle of
measurement in economic management. We must understand that what cannot be
measured cannot be planned and what cannot be planned cannot be achieved. In
more developed climes the lifeblood of governance is centred on data gathering,
data processing and data analysis, these processes funnel into the more visible
acts of policy formulation and execution. In the United States of
America, for example, the Congressional Budget Office (CBO) provides a stream
of data that enables citizens to assess how well municipal, state and national
economies fare. The apolitical nature of the CBO creates confidence and
establishes the credibility of the governments actions in the minds of
citizens.

In God We Trust
Everything Else Is Data
The
data provides citizens with a set of empirical references that build deep
confidence in the process of governance. Regular and accurate data provided at
scheduled periods make the citizens aware of not only the government's plans
but also provides a nexus between citizen's responsibility and the government's
obligations. If citizens desire omelets then they realize that they must
be prepared to break eggs. Or if people desire a meal of pounded yam, they must
be prepared to befriend the pestle and mortar. However, trouble starts
when the citizen's eggs (i.e, taxes) result in audio (or phantom) omelets or
when the citizen's yams, do not feel the pounding beat of a pestle doing
justice to the bottom of a mortar.
Data
establishes a sense of equity and the more the sub-national governments rely on
data as modes of citizen engagement, the greater the trust that is established
between the governed and the governing.
BudgIT
through its annual State-of-the-States reports creates a framework for
objective and enlightened interaction between taxpayers and tax managers.
Indeed by providing comparative budget data across sub-national entities or
states, BudgIT offers a platform for citizen's assessment of the fiscal
performance of those they elected to public office. A governor and his or her government
are as good as the value they add to the average lives of the citizens within
their states. The measure of the worth of a governor of a state is the measure
of his or her efforts at fiscal stability, secular growth in gross domestic
state product, and the improvement in social capital per head.
This
is brought to life by a quick review of the key findings of BudgIT's 2020
State-of-the-States report. The report notes as follows:
- The total debts of the states in 2019 rose by 162.87% to N3.3trn. This
means that state government budgets have been increasingly funded by local
and foreign debts and state finances have required increasingly larger
amounts of financial leverage. Is this good or bad? Well, it depends. If a
state government's revenue (particularly its internally generated revenue
(IGR)) can cover recurrent expenditure and equally meet at least 50% of
its capital needs, then leveraging the states expected future cash flows
may be a smart fiscal manoeuvre to speed up growth and provide critical
infrastructure at a reasonable cost, however, if a state appears to be
struggling to meet its recurrent expenditure and decides to borrow heavily
to cover its regular operational and capital costs, then the outcome could
be very unpleasant. Like an ostrich with its head buried in the
sand, a state with a heavy debt overhang leaves its rear vulnerable to
being kicked very hard by harsh economic realities. If the debt
obligations of states were fairly high pre-COVID-19, then in 2020 the
financial leverage of Nigeria's largest sub-national entities, the states,
is bound to get worse. BudgIT's figures of the debts of states in
2019 give little if any warmth.
Illustration 1 Eyeing State's Domestic Debt Monster H1 2020

Illustration 2 Eyeing State's Foreign
Debt Beast H1 2020

- BudgIT's
State-of-the-States 2020 report notes that several states have seen their
overhead costs spiral. State's like Ekiti, Kogi, Kano, Plateau, Kwara,
Taraba, Adamawa and Benue have witnessed relatively high recurrent costs
to revenue ratios. Most recurrent expenditures represent overhead expenses
that generally speak to the relatively high ratio of public servants to
the state's overall labour force. This brings about subnational policy
dilemmas that are made worse by pandemics such as COVID-19. A high
public-sector labour force requires high fiscal commitments to recurrent
spending to the detriment of capital spending which would drive
private-sector enterprise and provide more government revenue,
faster-paced industrial development, upgrading of human capital skills and
the deepening of domestic industrial value chains.
- The five states that topped the 2020 State-of-the-States report on
its Fiscal Sustainability Index were: Rivers state, Anambra state, Ogun
state, Lagos state and Kano state. So, maybe we should ask the question;
what do all these states have in common? The answer appears to be that
they are all key economic hubs. Each state demonstrates a competitive and
strategic advantage either in the oil and gas sector (Rivers state),
commerce and services (Lagos), manufacturing and processing (Anambra and
Ogun states) or manufacturing and agricultural produce (Kano state). The
dominant presence of these sectors within the respective states mentioned
provides large and unique economic multipliers that are yet to be
optimally explored.
- The BudgIT 2020 report on Nigerian states highlights five states
with notable foreign debt portfolios. At a time of COVID-19 and with oil
prices crawling between a US$40 per barrel and US$45 per barrel price
band, the outlook for the naira to foreign currency exchange rate is dim.
This means that states with high foreign debts would have to repay the
loans with larger naira income than was planned at the time the debt was
contracted thereby putting added pressure on state finances. The five
states with the highest foreign debt budgets were Lagos (US$1.5bn), Kaduna
(US$554.7m), Edo (US$275.92m), Cross Rivers (US$208.96m), and Bauchi
(US$133.9m).
Illustration 3 Narrowing The View on Subnational Challenges

Bringing LGAs Into Play
State
Governments have been ambivalent about the fiscal status of local governments
within their states. The average local government authority has been treated as
a convenient nuisance; convenient for federal revenue allocation but a nuisance
concerning their usefulness as units of fiscal administration. LGAs must be
considered as important parts of the country's fiscal architecture they should
not be allowed to hide behind the finger of their state budgets. This unit of
administration must be held accountable and should attract as much attention as
states. Indeed, we believe that BudgIT should prepare itself for a deep dive
into the State of State LGAs. Accountability should be as much a
bottom-up affair as it is a top-down one. Therefore, hopefully, in BudgIT's
next report on the states, we would like to see the relative financial
positions of a selected number of LGAs if not all the LGAs in the country. Or
perhaps, BudgIT could opt for a separate report on LGAs, which would have a
powerful effect on improving the quality of governance at the grassroots where
most citizens make their daily living.
We
note that all too often analysts, commentators and citizens generally tend to
concentrate on the condition of the federal government's budget rather than the
budgets at the everyday levels of living which is the budgets of the
sub-nationals or states and local governments which are just as important than
the federal fiscal balance.

Running out of Time and Ideas
With
the coronavirus pandemic terrorizing global economies frontier nations like
Nigeria are running out of time and unfortunately they are equally running out
of ideas. But extraordinary times require extraordinary measures, in the words
of Albert Einstein, we cannot solve a problem at the same level of thinking
that created the problem in the first place, in other words, we need new
paradigms. The nature of the fiscal realities of Nigerian states in an era of a
global health pandemic and lower international oil prices would require deeper
thinking and more aggressive action. Businesses within states will experience
revenue meltdowns in the year with their profits disappearing. This would lead
to lower tax revenues and higher levels of unemployment as businesses collapse.
The consequence of failing private enterprises would be that states from 2020
will see their debts rise as the means to repay loans vanish. There will be
very few if any federal fiscal support schemes by way of state financial
bailouts or federal loans in 2020 as the tight financial position of the
federal treasury itself would make this impracticable. The fiscal support
structures put in place by the federal government in 2016/2017 to help states
with their financial difficulties cannot be repeated any time soon. In fact
from the year 2020, the federal government will have to deal with the fiscal
demons of its own.

Thinking Outside The Traditional Box
To
wriggle outside the problems states will need to be imaginative, creative and
strategic. A few things states might need to do would include:
- Generate liquidity by liberating idle assets. Many states have some
projects that have been abandoned but might be considered attractive to
private sector investors. The projects could be sold to private interests
on the best cost-recovery basis.
- States could encourage companies to support infrastructural
development projects by constructing the infrastructure and compensating
investors with tax credits which they can charge off against present and
future tax obligations.
- States could ignite economic activity by removing obstacles to
business growth in their respective territories. In some states the simple
control of non-state actors that collect different levies and tolls could
bring down the cost of doing business in their states, this would reduce
product prices and service costs thereby facilitating faster state GDP
growth which in turn would improve the state's IGR. For states that depend
heavily on federal funds (FAAC) for survival the ease of doing business
and the stimulation of the state's domestic economy is crucial. As federal
revenues decline on the back of lower oil earnings the size of the monthly
FAAC distribution will decline and this would cause major fiscal
challenges for states with low IGR. In other states what may be needed is
rethinking, reimaging and restrategizing. This could hold for Lagos state
(see illustration below).
Illustration 4 Lagos; Reimagining The
Future

Illustration 5 The Facts About FAAC 2019

- States could also decide to identify core sectors of their
economies and categorize them as 'lead' sectors. These lead sectors would
be handled within a project management framework with stated objectives
carried out within specific timelines and in partnership with public and
private sector team leaders who provide the modelling framework with which
the sectors would be expected to operate. The team leaders would be in
charge of managing the resources, monitoring progress and reporting on the
divergence between goals and actual performance. The essence of this
approach is to change the template for growth models adopted by states in
the past. The new model would be actionable based on the use of big data,
informatics, artificial intelligence (AI) and machine learning. Within
this arrangement data must be 'open source' to the managers and the
traditional secrecy of bureaucracy will have to be jettisoned.

Takeaways/Endpoints
The
BudgIt's report yields up some key takeaways which would include but would not
be limited to the following:
- States cannot be allowed to borrow without guidelines and limits to
protect the solvency of these subnational entities. A few states could be
considered technically bankrupt and if they were private commercial
institutions, they would have been wound up. Considering the fiscal status
of some states the challenge that needs to be urgently addressed under a
period of COVID-19 is the contemplation of Murphy's law that
states that what has gone bad could get worse. To prevent this ugly
outcome all states need to rethink their fiscal positions and realign
their budgets with the exigencies of the time. The pork-barrel spending
some states have become accustomed to must give way to stricter
governance. Should we be talking about expenditure cuts in a recession?
Unfortunately yes, although it sounds counterintuitive, it is inevitable
if some states are to avoid dire socioeconomic outcomes.
- States must prepare for unforeseen circumstances or black swans
(which are unknown unknowns) like COVID-19 and prepare for grey swans
(which are known unknowns) such as poor weather conditions (floods) and
the likely consequences of poor harvest on food security in 2020.
- Another takeaway is that BudgIT may need to integrate sensitivity
analysis into its future reports. The sensitivity data would tell us what
would likely happen if the Lagos State government's revenue expectation
slips by 20%, how would it affect the state's budget balance? Although
BudgIT's reports are usually after the fact, for example the 2020 report
addresses 2019 data, nevertheless sensitivity analysis would still give us
a sense of near fiscal misses or actual fiscal triumphs compared to what
could have happened given sensitivity analysis assumptions.
- The fiscal regulatory environment needs to be made clear, concise
and consistent. There is still a whole lot of problems with the
transperancy of state budgets.
Download Power Point Presentation Here

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