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The New Normal; States Scurry for Higher IGRs

State and Local Govts	3377 VIEWS
State and Local Govts
3377 VIEWS

Wednesday, October 14, 2020, / 02:25 PM / By Proshare Research / Header Image Credit: Infocheck

A drop in federation account allocation committee (FAAC) monthly distributions in H1 2020 has put the various state governments in different phases of financial distress. States with low internally generated revenues have seen themselves besieged to meet recurrent obligations as worker's salaries and institutional running costs have become deep rivers to drown. Indeed, with COVID-19 still dislocating domestic local supply chains in 2020, the outlook for state finances remains dim.

But not everything has tumbled down the hill as a few states have managed to pull magic tricks to grow personal income (PAYE) and other taxes despite the pains of the pandemic. States appear to have recorded increases in components of their IGR based on the peculiarities of their economies. For example, Lagos state recorded a rise in the PAYE component of its IGR by +2.11%, MDAs revenue grew by +6.51% while the state recorded a decline in other taxes (-24.85%) and direct assessment (-10.65%). On the other hand, Imo state recorded a decline in PAYE by -33.99%, direct assessment -81.54%, and road taxes by -74.45% while it recorded growth in other taxes +74.35%, and MDA revenues +335.37%.

Diving into the financial status of other states shows a trend of low IGR and high FAAC-dependence. States with large FAAC to revenue ratios in H1 2020 include Bayelsa state 92.48%, Jigawa state 89.94%, Niger state 86.63%, Yobe state 85.72%, and Adamawa state 85.67%. On the other hand, only six (6) sub-nationals recorded IGR to revenue ratios above 40% in the last half-year with Lagos state leading the pack. The six (6) sub-nationals with the highest IGR to revenue ratio in H1 2020 were Lagos state 80.34%, Ogun state 57.75%, FCT 51.58%, Rivers 46.24%, Oyo 41.73%, and Osun state 40.56%. The high dependency on FAAC by sub-nationals for sustainability necessitates the need for creative thinking to bolster economic growth.

Reports from the national bureau of statistics (NBS) show a decline in total IGR generated by all the 36 states in the country and the FCT by -11.7% in H1 2020. The total IGR generated by the 36 states of the federation and the FCT slumped to N612.87bn in H1 2020 from N693.91bn in H1 2019. While the Q2 2020 IGR figure dipped to N259.73bn from N353.14bn posted in Q1 2020 which reflected negative growth of -26.5% quarter-on-quarter (Q-o-Q). Indeed, twenty-five (25) states including FCT recorded a decline in IGR in H1 2020 while eleven states (11) recorded an increase.

The geopolitical region with the highest internally generated revenue in H1 2020 was the South-West region with an IGR of N283.06bn while the geopolitical region with the lowest comparative IGR number was the North East region with an IGR of N26.65bn in H1 2020. Four geopolitical regions recorded a decline in their IGR in H1 2020 while two geopolitical regions recorded an increase in their IGR in H1 2020. North Central, North West, South-South, South West region recorded a decline in H1 2020 by -20.84%, -24.58%, -18.60%, and, -4.03% respectively. While the North East and South East recorded an improvement in IGR in H1 2020 by +7.6%, and +4.19% respectively (see Chart 1).

Chart 1: Geopolitical Regions IGR H1 2020 (N'bn)

Source: NBS, Proshare Research

IGR Numbers in H1 2020 -A Field Trip Across Regions

South West

Lagos recorded the highest IGR of N204.51bn in the region while Ekiti state recorded the lowest IGR of N3.21bn in H1 2020. All the states in the South West region except for Oyo state recorded declines in their internally generated revenue in H1 2020. The states in the region with the highest percentage decline in IGR in H1 2020 were Ekiti, Ondo, and Ogun state with declines of -36.44%, -28.53%, and -19.95% respectively. On the other hand, Oyo state recorded an improvement in its IGR in H1 2020 by +25.89% as its IGR increased from N14.06bn in H1 2019 to N17.7bn in H1 2020 (see Chart 2).

Chart 2: South West IGR H1 2020 (N'bn)

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Source: NBS, Proshare Research

North Central

The FCT recorded the highest IGR of N35.31bn in the region while Niger state recorded the lowest IGR of N4.02bn in H1 2020. Five (5) sub-nationals in the region recorded a decline in IGR in H1 2020 while two (2) sub-nationals recorded an improvement in IGR in H1 2020. The five sub-national that recorded a decline in IGR were Niger state -55.97%, Benue -55.89%, Kwara state -41.83%, FCT -8.71%, and Plateau -0.14%.

The two sub-nationals that recorded an improvement in IGR were Kogi state +11.23%, and Nasarawa state +21.90% (see Chart 3).

Chart 3: North Central IGR H1 2020 (N'bn)

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Source: NBS, Proshare Research

North East IGR H1 2020

In the North East region, four (4) states recorded an improvement in IGR in H1 2020 while two (2) states recorded a decline in IGR in H1 2020. States that recorded improvement in IGR include Borno +37.24%, Gombe +81.34%, Taraba +24.16%, and Yobe +77.38%.

The two states that recorded a decline in IGR in H1 were Adamawa -25.15%, Bauchi -30.47% (see Chart 4).

Chart 4: North East IGR H1 2020 (N'bn)

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Source: NBS, Proshare Research

South-South IGR

In the South-South region, Rivers state recorded the highest IGR of N64.59bn in H1 2020 while Bayelsa state recorded the lowest IGR of N5.39bn in H1 2020. All states in this region a decline in IGR in H1 2020. The state with the highest percentage of decline in IGR in H1 2020 was Cross Rivers state which declined by -51.88% while Bayelsa state recorded the least decline in IGR by -8.33% (see Chart 5).

Chart 5: South-South IGR (N'bn)

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Source: NBS, Proshare Research

North West IGR H1 2020

Kano state recorded the highest IGR of N17.51bn in North West region in H1 2020 while Jigawa state recorded the lowest IGR of N3bn in the region in H1 2020.

All states in the North West region except Katsina state recorded a decline in IGR in H1 2020. The state's decline in IGR was as follows Jigawa -44.13%, Kaduna state -35.04, Kano state -5.66%, Kebbi state -7.19%, Sokoto state -61.92%, and Zamfara state -1.66%. On the other hand, Katsina recorded an improvement in its IGR of +15.25% in H1 2020 (see Chart 6).

Chart 6: North West IGR H1 2020 (N'bn)

Proshare Nigeria Pvt. Ltd.

Source: NBS, Proshare Research

Thinking Outside the Metal 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 1).

Illustration 1: Lagos; Reimagining The Future

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Going forward what is clear is that normality will no longer look the same. States in Nigeria will need to nudge themselves into new mind frames and elevated headspaces to build fiscal frameworks that would not only tackle the immediate challenges of recurrent fiscal funding but also take care of the capital requirements of the future.