2021 State of States Report: Fiscal Options for Building Back Better

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Sunday, October 03, 2020   /06: 10 AM / by BudgIT/ Header Image Credit:  BudgIT

 

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Fiscal Outlook

Economic shocks from the COVID-19 pandemic took a toll on states' Internally Generated Revenue (IGR) and their share of federally collected revenue in 2020. Cumulatively, all 36 states saw a 3.43% decline in their IGR from N1.26tn in 2019 to N1.21tn in the year 2020 under review. In total, 18 states saw a decline in their year-on-year IGR2 while 18 other states could weather the fiscal storm induced by the pandemic, growing their revenue - in some cases by as high as 87.02%. Worthy of note is Lagos state, which despite being the epicentre of the pandemic, saw a 5.08% growth in its IGR, a testament to the resilience of its fiscal strategy.

 

Rivers state once again topped the overall 2021 Fiscal Performance Ranking despite COVID-19 induced fiscal shocks to its IGR, indicating that the fiscal fundamentals of this state, compared to others in the country, are more prudently managed. Two states made it, as new entrants, to the Top 5 category in the overall 2021 ranking - Ebonyi state emerged in 2nd position; up from 6th position in 2020 ranking, and Kebbi state emerged in 5th position, up from 11th position in 2020. The entrance of Ebonyi and Kebbi states into the Top 5 category was driven largely by growth in both state's IGR as recorded by the National Bureau of Statistics. Ebonyi state grew its IGR by 82.3% from N7.5bn in 2019 to N13.6bn in 2020, while Kebbi state grew its revenue by 87.02% from N7.4bn in 2020 to N13.8bn in 2020. In the case of Ebonyi state, an additional performance driver was that it also significantly prioritized investment in state infrastructure, given its available revenue; it spent more on capital expenditures (N76.1bn) compared to its spending on operating expenses (N29.5bn). Ebonyi is also one of five states who spent more on capital expenditures than operating expenses.

 

In the 2021 Performance Ranking, two states dropped out of the Top 5 in overall ranking; Ogun state (now 19th) and Kano state (now 22nd), due to a sharp decline in their IGR in 2020. This decline in IGR affected their performance in Index A, a component of the overall ranking model with the highest weight (45%). In the case of Ogun state, the reduced priority placed on investment in infrastructure - when compared to its operating expense - affected its performance on the 'Index D' component of the ranking model, further contributing to its decline.

 

States Comparative Viability

Only three (3) states in the country can meet their operating expenses obligations with a combination of their IGR and Value Added Tax (VAT) as measured in our 'Index A' ranking; these states are Lagos, Rivers, and Anambra and they appear at the top of the 'Index A' ranking. In contrast, states at the bottom of the 'Index A' ranking need to do more to rapidly consolidate on any ongoing strategies to improve their IGR and by extension, their viability as federating entities. This is necessary considering the comparative size of their operating expenses and the global push to transition away from fossil fuels like crude oil, a key source of federally distributed revenue.

 

These states at the bottom of 'Index A' ranking include Jigawa, Delta, Benue, Taraba and Bayelsa. Nevertheless, all Nigerian states still need to work hard to build economic prosperity and create more jobs in their states to ensure that there is more money in circulation and economic activities that can be taxed to improve their IGR.


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Subnational Debt Outlook

Cumulatively, the 36 states total debt burden increased by N472.63bn3 (or 8.78%) from N5.39tn in 2019 to N5.86tn in 2020. This increase in total subnational debt was driven largely by exchange rate volatility which saw the value of the naira jump from N305.9/$1 in 2019 to N380/$1 as at December 31st 2020. States with the highest foreign debt were significantly hit due to negative exposure to exchange rate volatility. These states include: Lagos, Kaduna, Edo, Cross River and Bauchi (See the datasheet on 2020 Foreign Debt by state). Furthermore, five (5) states accounted for more than half (that is 63.63% or N300.7bn) of the net year-on-year subnational debt increase of N472.63bn for all the states between 2019 and 2020: the states are Lagos, Kaduna, Anambra, Benue and Zamfara.

 

Eleven states in the country still have a comparatively low debt burden; their debt profiles are so low they can theoretically pay it off in a single year (using their 2020 total revenue). These states are: Jigawa, Sokoto, Kogi, Ebonyi, Katsina, Yobe, Bayelsa, Ondo, Kebbi, Kwara and Nasarawa and they appear at the top of the 'Index C' ranking. Eight (8) of these eleven states mentioned are in the north, while three (3) are in the south. We note that a low debt burden in itself is not necessarily a good or a bad thing; however, these states are highlighted because they still have comparatively more leeway to borrow.


Thus, they need additional technical support to be more strategic in their future borrowing to ensure value for money.

 

Additionally, states at the bottom of the 'Index C' ranking have a high debt burden when compared with their 2020 total revenue. These states will need to urgently develop Public-Private Partnership (PPP) models for financing expenditures in critical sectors, as their attractiveness to potential lenders is significantly reduced. The least attractive states in this regard are Cross River, Plateau, Imo, Adamawa and Bauchi, and they would need the most support from local and international development partners to build their capacity to leverage different Public-Private Partnership models for effective and affordable public service delivery.

 

Spending priorities

Based on each state's 2020 revenue, five states prioritized investment in infrastructure by spending more on capital expenditure than operating expenses. The states are Ebonyi, Rivers, Anambra and Cross River states in the south and Kaduna state in the north. These states appear at the top of the 'Index D' ranking.

 

States appearing at the bottom of 'Index D' are those who prioritized operating expenses over investment in infrastructure for their citizens: a fiscal practice this project does not encourage. Notable in this regard are Benue, Kogi, and Taraba, whose overhead cost component of their operating expenses was higher than their respective investments in capital expenditure in 2020. There is a need for the affected states to immediately rein in their overhead expenditures and reprioritize investments in capital infrastructure for citizens.

 

Nineteen states, including eight oil-producing states, saw a year-on-year decline in their capital expenditure, while seventeen states were still able to improve their investment in capital expenditure, from 2019 levels despite fiscal constraints induced by COVID-19. For a breakdown by state, see the datasheet/ infographic of "Year-on-Year capital expenditure growth by States".


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Building back better

Without a doubt, COVID-19 ravaged the revenues of many Nigerian state governments and the need to explore options for 'building back better'4 cannot be overstressed. A critical first step for states would be to rapidly block financial leakages that could further drain the little available revenue or future revenue. From the Annual Performance Assessment (APA) results of states under the State Fiscal Transparency, Accountability And Sustainability (SFTAS) program, released in Q2 2021, only 7 states in Nigeria had functioning Treasury Single Accounts (TSA), an otherwise critical fiscal strategy that gives states more control over their revenues and could help states reduce leakages. The results were better for states that had introduced reforms to block leakages, due to the existence of "ghost workers" and other forms of payroll fraud. About 24 states and 27 states respectively, had introduced "Biometric use in payroll management" and "Bank verification number use in payroll management".

 

Furthermore, only 16 states published details of their contracts online for public scrutiny, while 20 states were yet to do so at the time of the assessment. Procurement processes are one of the biggest areas through which revenue leakages can occur. Hence, the need for states to adopt open contracting principles to minimize instances of inflated contracts and other forms of procurement and procedural fraud.

 

To ensure a sustainable recovery and more resilience against future shocks, states need more revenue from a diverse revenue base spanning multiple sectors. Unfortunately, 39.1m people representing 56.1% of the combined 69.7m labor force across all states in the country could not contribute adequately to the IGR pool of their respective states, through payment of income taxes (PAYE) as they were either unemployed or underemployed. This cost the states billions of naira in forgone revenue and remains a critical setback all 36 states have to address, in their enlightened self-interest, if they would like to be more resilient. States have to revamp their economic prosperity blueprints and redesign them around incentivizing the private sector to exploit each state's export potential across different sectors to stimulate job creation.

 

Aside from the huge revenue forgone from income taxes as a result of high unemployment and underemployment in their states in 2020, the states also missed out on the multiplier effects of having a gainfully employed workforce from the revenues (Road Taxes, Value Added Taxes, etc.) that would have accrued from having more people in their states with higher purchasing power for consumption goods and services. This needs to change.

 

Furthermore, to complement efforts in raising revenue and blocking revenue leakages, states also require a rapid build-up of capacity in deploying custom and innovative Public-Private Partnership (PPP) models to deliver on critical infrastructure projects and programs. This is especially in key sectors like Health, Education, Housing, and Agriculture given the shrinking fiscal space in which states are operating and will continue to operate in the next few years.

 

Welcome to the 2021 State of States report and we hope you find one or two golden nuggets.

 

Download Here - 2021 Edition of State of States Report


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