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Economy | State and Local Govts

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

Nov 27, 2020   •   by   •   Source: Proshare   •   eye-icon 2080 views

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


A bleak outlook

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

 

Statesalready face significant human development issues - poverty , unemploymentunderemployment, avoidable disease outbreaks (excluding COVID -19) and a hostof third-world problems. To solve these issues, each state needs to, first andforemost, be a sustainable subnational entity - that is, the state is generatingenough revenue to pay its workers , its creditors and still have significantleft over to cover  capital expenditure interventions for solvingdevelopment issues.

 

States are in distress

Fromour analysis, for 8 states in the country, their respective total r e venue wasnot enough to fund their recurrent expenditure obligations (salaries, overhead,debt service obligations) and meet their respective loan repayment schedulesthat 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 earlysigns of distress particularly for states in this category who have very lowrevenue generation capacities. Without cutting down certain components of theirrecurrent expenditure or radically growing their internally generated revenue ,the affected states may have to borrow to fund parts of their recurrentexpenditure .

 

Misplaced priorities, soaring debts

Basedon their fiscal analysis, only five states in the country are prioritisingcapital expenditure over recurrent obligations - Rivers, Kaduna, Akwa Ibom,Ebonyi and Kebbi. However, the quality of the capital expenditure still leavesmuch to be desired as explored in the narratives for the respective stateprofiles. The remaining thirty-one (31) states in the country prioritisedrecurrent expenditure according to their 2019 financial statements. Recurrentexpenditures are not necessarily a bad thing especially when skewed towardssectors like health and education which have expenses like payment of teachersand doctors salaries that are recurrent in nature. However, of the states inthis category, 11 had overhead costs that were larger than their capitalexpenditures. These 11 states are : Adamawa , Bauchi , Bayelsa, Benue, Ekiti,Kano, Kogi, Kwara, Nassar awa Plateau, Taraba.

 

Thetotal debt for all 36 states surged by 162 .87% or N3.34tn, from N2.05tn in2014 to N5.39tn in 2019, with 10 states accounting for approximately half orN1.68tn 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 thestates were from the North , Kaduna and Adamawa; of the states in this debtcategory, Kogi and Adamawa are also in the category of states who spent more onoverhead costs for the government than on capital expenditures that directlybenefit the people.

 

Narrowing options

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

 

However,the majority of Nigerian states, except Cross River, are still within the debtceiling that allows them to take on more debt from other sources. The ceilingfor 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 ofN230.88bn as at December was 298.06% of its total revenue of N77.46bn. Thesafeguards for borrowing from the capital market are stricter for statesbecause inability to pay back capital market investors could more quicklytrigger a reputational crisis for a country.

 

Exchangerate volatilities recently triggered by COVID-19 induced shocks have worsenedthe situation for states that currently have large foreign debt and havehopefully crystallised the risks for those who plan to incur more. The nairasuffered a recent 25.98% devaluation from N305.9/$1 as at December 2019 toN380/1USD as at September 2020. The implication of this for states is that forevery $1 in foreign debt a state owes, it now needs to raise an extra N74.1from taxpayers to pay it back. The worst hit are the 5 states with the highestforeign debt burden: Lagos ($1.4bn) Kaduna ($554.78m) Edo ($275.92m) CrossRiver ($208.96m) and Bauchi ($133.90m). Lagos state for example now needs toraise at least N103.46bn additionally from taxpayers over the lifespan of thesame $1.4bn foreign debt stock to pay it back due to the devalued naira. That'sless money available for development projects.

 

The way forward

Stateshave seen some improvement in their IGR between 2014 and 2019, however there isstill a need to put systems in place for aggressive IGR growth within theirstates especially as falling crude oil prices, OPEC production cuts and otherCOVID-19 induced headwinds are set to impact federally collected over the nexttwo years.

 

Thispaints a bleak outlook for Nigerian states who depend on FAAC allocation fortheir survival, although dwindling federal revenue will affect all statesdifferently; Lagos, Ogun and Rivers state will be least affected as they reliedon federally collected revenue (Net FAAC) for only 22.82%, 35.31% and 53.02% oftheir total revenues respectively. Three states Bayelsa, Borno and Katsina willbe 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


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