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BudgIT Publishes 2020 Revised State of States Reports, Measure Epidemic Preparedness of States

State and Local Govts	1996 VIEWS
State and Local Govts
1996 VIEWS

Friday, November 27, 2020 / 10:26 AM / by BudgIT / Header Image Credit: Twitter; @BudgITng

A bleak outlook

Soaring debt burden , imprudent fiscal planning, and nearly a decade of misplaced expenditure priorities have beaten a clear path to fiscal crisis for a majority of Nigeria's 36 states. In the 2020 Fiscal Sustainability Index, some states rank higher than others, but most are still below the sustainability point, except for Rivers state which occupies the number #1 position on the index; it is able to meet its recurrent expenditure with only internally generated revenue, IGR and value added tax, VAT. It also has a total r e venue greater than its total debt and prioritises capital over recurrent expenditure.

States already face significant human development issues - poverty , unemployment underemployment, avoidable disease outbreaks (excluding COVID -19) and a host of third-world problems. To solve these issues, each state needs to, first and foremost, be a sustainable subnational entity - that is, the state is generating enough revenue to pay its workers , its creditors and still have significant left over to cover capital expenditure interventions for solving development issues.

States are in distress

From our analysis, for 8 states in the country, their respective total r e venue was not enough to fund their recurrent expenditure obligations (salaries, overhead, debt service obligations) and meet their respective loan repayment schedules that were due in 2019. The worst hit of these 8 states are Osun, Bauchi , Plateau, Gombe, Adamawa , Ekiti, Kogi and Oyo state. This could indicate early signs of distress particularly for states in this category who have very low revenue generation capacities. Without cutting down certain components of their recurrent expenditure or radically growing their internally generated revenue , the affected states may have to borrow to fund parts of their recurrent expenditure .

Misplaced priorities, soaring debts

Based on their fiscal analysis, only five states in the country are prioritising capital expenditure over recurrent obligations - Rivers, Kaduna, Akwa Ibom, Ebonyi and Kebbi. However, the quality of the capital expenditure still leaves much to be desired as explored in the narratives for the respective state profiles. The remaining thirty-one (31) states in the country prioritised recurrent expenditure according to their 2019 financial statements. Recurrent expenditures are not necessarily a bad thing especially when skewed towards sectors like health and education which have expenses like payment of teachers and doctors salaries that are recurrent in nature. However, of the states in this category, 11 had overhead costs that were larger than their capital expenditures. These 11 states are : Adamawa , Bauchi , Bayelsa, Benue, Ekiti, Kano, Kogi, Kwara, Nassar awa Plateau, Taraba.

The total debt for all 36 states surged by 162 .87% or N3.34tn, from N2.05tn in 2014 to N5.39tn in 2019, with 10 states accounting for approximately half or N1.68tn of this increase. Eight of these states were from the South -Lagos, Rivers, Akwa Ibom, Imo, Kogi, Edo, Osun and Cross River - while two of the states were from the North , Kaduna and Adamawa; of the states in this debt category, Kogi and Adamawa are also in the category of states who spent more on overhead costs for the government than on capital expenditures that directly benefit the people.

Narrowing options

Options for further borrowing are reducing for Nigerian states due to safeguards and debt ceilings put in place by the federal government to prevent states from slipping into debt crisis. The revised 2020 borrowing guidelines published by Nigeria's Debt Management Office reference Section 223 (1b) of the 2007 Investments and Securities Act (ISA) which requires that for states to borrow from the capital market in any fiscal year, their total debt must not be more than 50% of their previous year's total revenue. For fiscal year 2020, all 36 states will need to pass through the eye of the needle to raise fund from the capital market as they now have total debts as at 2019 which breached this debt ceiling.

However, the majority of Nigerian states, except Cross River, are still within the debt ceiling that allows them to take on more debt from other sources. The ceiling for external borrowing is set at a state's total debt burden not exceeding 250% of their total revenue in or the previous year. Cross River's total debt of N230.88bn as at December was 298.06% of its total revenue of N77.46bn. The safeguards for borrowing from the capital market are stricter for states because inability to pay back capital market investors could more quickly trigger a reputational crisis for a country.

Exchange rate volatilities recently triggered by COVID-19 induced shocks have worsened the situation for states that currently have large foreign debt and have hopefully crystallised the risks for those who plan to incur more. The naira suffered a recent 25.98% devaluation from N305.9/$1 as at December 2019 to N380/1USD as at September 2020. The implication of this for states is that for every $1 in foreign debt a state owes, it now needs to raise an extra N74.1 from taxpayers to pay it back. The worst hit are the 5 states with the highest foreign debt burden: Lagos ($1.4bn) Kaduna ($554.78m) Edo ($275.92m) Cross River ($208.96m) and Bauchi ($133.90m). Lagos state for example now needs to raise at least N103.46bn additionally from taxpayers over the lifespan of the same $1.4bn foreign debt stock to pay it back due to the devalued naira. That's less money available for development projects.

The way forward

States have seen some improvement in their IGR between 2014 and 2019, however there is still a need to put systems in place for aggressive IGR growth within their states especially as falling crude oil prices, OPEC production cuts and other COVID-19 induced headwinds are set to impact federally collected over the next two years.

This paints a bleak outlook for Nigerian states who depend on FAAC allocation for their survival, although dwindling federal revenue will affect all states differently; Lagos, Ogun and Rivers state will be least affected as they relied on federally collected revenue (Net FAAC) for only 22.82%, 35.31% and 53.02% of their total revenues respectively. Three states Bayelsa, Borno and Katsina will be worst hit by dwindling revenue as they relied on Net FAAC for 89.56%, 88.30% and 88.16% of their total revenues respectively in 2019.

Download Here - Revised 2020 Edition of State of States Report