Sunday, November 21, 2021 07:00 AM / by Fitch Ratings/ Header ImageCredit: Wikipedia

Nigerianstates' framework of fiscal rules is evolving, due to their limitedown-revenue-generation capacity and developing debt and liquidity-managementregulations and practices amid the devolution of a wide set of responsibilitiesto the states, Fitch Ratings says in a new framework report.

MostNigerian states' main revenue comes via monthly transfers from the centralgovernment, and these mostly depend on volatile oil-related revenue. Transfersrepresent a material share of the states' revenue and are essential to coverrecurrent expenditure, while the states' ability to mobiliseinternally generated revenue (IGR) and to tap liquidity sources on the marketis generally limited.

Statesare required to provide a wide set of key public services, creating verticalfiscal imbalances that can create structural funding gaps. The states areimportant in the country's development and modernisationsince they carry out a significant proportion of investments with own resourcesor through multilateral borrowings with institutional lenders.

Thenational government dominates Nigerian intergovernmental relations, as itcontrols the equalisation mechanism enacted throughtransfers. Therefore, the sovereign rating caps the Standalone Credit Profile(SCP) of states whose SCPs are above the sovereign.

Tobetter differentiate Nigerian states, Fitch also assigns issuer-level nationalscale ratings, which evaluate local issuers' relative vulnerability to defaulton local-currency or legal obligations, excluding transfer and convertibilityrisk.

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