Sunday, November 21, 2021 07:00 AM / by Fitch Ratings/ Header Image
Nigerian states' framework of fiscal rules is evolving, due to their limited own-revenue-generation capacity and developing debt and liquidity-management regulations and practices amid the devolution of a wide set of responsibilities to the states, Fitch Ratings says in a new framework report.
Most Nigerian states' main revenue comes via monthly transfers from the central government, and these mostly depend on volatile oil-related revenue. Transfers represent a material share of the states' revenue and are essential to cover recurrent expenditure, while the states' ability to mobilise internally generated revenue (IGR) and to tap liquidity sources on the market is generally limited.
States are required to provide a wide set of key public services, creating vertical fiscal imbalances that can create structural funding gaps. The states are important in the country's development and modernisation since they carry out a significant proportion of investments with own resources or through multilateral borrowings with institutional lenders.
The national government dominates Nigerian intergovernmental relations, as it controls the equalisation mechanism enacted through transfers. Therefore, the sovereign rating caps the Standalone Credit Profile (SCP) of states whose SCPs are above the sovereign.
To better differentiate Nigerian states, Fitch also assigns issuer-level national scale ratings, which evaluate local issuers' relative vulnerability to default on local-currency or legal obligations, excluding transfer and convertibility risk.
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