State of States 2018 - Lagos Dropped From 2nd to 4th Place on The Fiscal Sustainability Index

Tuesday, September 19, 2018 / 10:43 AM / BudgIT

Fiscal Sustainability Index Analysis

Riversstate sits on top of the Fiscal Sustainability Index due to its robust revenueproﬁle and manageable recurrent expenditure obligation. The state’s actualrevenue of N209.12 billion in 2017, when juxtaposed with its recurrentexpenditure obligation of N141 billion in the same year, indicates Rivers isﬁscally stable, and able to cover its recurrent expenditure without borrowing.

Giventhat in 2018, recurrent expenditure is expected to fall to approximately N132billion, at face value, the state should have no problems paying its way, goingforward. Rivers is also one of Nigeria’s most vibrant, in terms of crude oildeposits; this position comes with a signiﬁcant share of annual Federal AccountAllocation Committee (FAAC) allocations.

Ouranalysis shows that increase in statutory allocations, mainly guided by oilrevenues, had a signiﬁcant impact on the Index. Rivers, Bayelsa, Delta, AkwaIbom, Edo and Ondo are among the top ten states in our Index. We also see acommendable appearance by the states with low expenditure outlay and sizeabledebt burden such as Anambra, Enugu and Katsina. We also noticed that Abia hastightened its recurrent projection, providing it the opportunity to leap on oursustainability rankings.

Lagosdropped from 2nd to 4th place on the Fiscal Sustainability Indexnotwithstanding the state’s ﬁscal advantage. Lagos’ Internally GeneratedRevenue (IGR), when compared with other states, is relatively high. Her IGR asat the end of 2016 was N287 billion; higher than its 2015 level of N268.2billion. In 2017, the state planned a recurrent expenditure spending of N305billion or N25 billion monthly.

Withits IGR not expected to grow signiﬁcantly above N300 billion, and its share ofFAAC revenue in the ﬁrst six months of 2017 at N6.6 billion, Lagos is expectedto meet its recurrent expenditure obligations. However, Lagos’ unusually highoverhead costs and debts continue to weigh its revenue down.

Ourresearch also showed that Osun state is not out of the woods yet as it stillranks 35 out of the 36 states. We are extremely concerned about the poor ﬁscalmanagement thinking in Cross River with its bogus budget plan of N1.3 trillion,which severely weighed it down on the Index. The state’s inability to meet itsrecurrent expenditure obligations, its heavy debt proﬁle and inefﬁcient IGRcollection weighed seriously on the state.

Whilethe ﬁscal structure of states has improved on the back of increasing oilrevenue, state governments need to tremendously embrace a high level oftransparency and accountability, develop workable economic plans, takehaircuts—especially on overheads—expand their IGR base and cut down on debtaccumulation.

Internally Generated Revenue

Stategovernments and state-controlled entities (local governments) collect andcontrol ALL revenues generated from personal income tax, property tax, roadtax, radio and television tax, among others. In 2017, Lagos state accounted forapproximately 35.86 percent of total IGR collected by states, down from 2016 levelof 37 percent. Lagos, Ogun, Delta and Rivers lead in terms of IGR uptakeper capita. Collection efﬁciency in Kano is abysmal but improving; despite itsvast market size, it could only collect N3,139 per head in 2017 up from N2,367per head in 2016. Kwara state’s per capita IGR uptake at N5,969 per head showsthe state is aggressively mobilising funds.

Onaverage, IGR uptake is N3,818 per head across the states; it is only in 10states that collection efﬁciency is higher than the statewide average. Theleast performing states include Bauchi, Katsina, Borno, Kebbi and Yobe states.It is crucial for state governments to design innovative policies around taxcollection, especially collection efﬁciency.

Value Added Tax

Dueto its market size, Lagos state tops in terms of VAT revenue in the ﬁrst sixmonths of 2018. Lagos VAT revenue receipts between January and June 2018averaged N8.033 billion monthly up from the average of N6.38 billion in theﬁrst six months of 2017, signiﬁcantly higher than Kano’s.

Nasarawa,Bayelsa, Gombe and Ebonyi trail the pack. It is evident in our analysis thatmany states lack the formal structures for the payment VAT. Twenty-nine out of36 states got less than N1 billion monthly, despite huge differential inpopulation.

Debt Stock

Totaldebt stock of Nigerian states has increased signiﬁcantly from the 2012 level ofN1.79 trillion to N4.49 trillion in 2017. With increased inability to meetrecurrent expenditure obligations and increased pressure, most states resort tomore debt uptake. Total debt proﬁle of the states rose from the 2014 level ofN2.13 trillion to 2017 level of N4.49 trillion.

Thetotal debt of Lagos state--the most indebted state in Nigeria--rose from the2014 level of N456.8 billion to N813.04 billion in 2017, accounting for 18.08percent of the total debt stock of state governments.

Index A

IndexA looks at the ability of states to meet their recurrent expenditure obligationwith state-owned revenue like value added tax, 13 percent derivation and IGR.In terms of weight, Index A was assigned 35 percent weight as it was criticalthat personnel and overheads (recurrent expenditure) of government are coveredwith tax revenue and other associated revenue peculiar to the state like 13percent derivation paid to oilproducing states without resorting to borrowing.

Whilegrowing states IGR by widening the personal income tax net is ideally the pathfor most states, some may use indirect tax through increased Value Added Taxundertaking due to socio-religious norms, political pressure and from thepolicy front adopted in 1991. States with natural resources like oil and solidminerals should explore those resources given the socioeconomic status of mostNigerians at this time as it gets increasingly difﬁcult to tax already heavilytaxed people.

Alternatively,some states may keep operating costs (like personnel and overhead costs) low tofree up more spending for social and economic infrastructure. States likeRivers, Lagos, Delta, Bayelsa and Edo sit on top of Index A.

Index B

Equallyimportant is the states’ ability to cover all recurrent expenditure obligationswithout resorting to borrowing. Index B which was assigned a weight substanceof 50 percent looks at states’ ability to meet its recurrent expenditureobligation using all revenue sources. Interestingly, about 16 states couldcover the recurrent

expenditureobligation without borrowing funds--a marked improvement over 2017.

Inthe ﬁrst six months of 2017, only 4 states could effectively meet their recurrentexpenditure obligation without borrowing, selling assets or/and donor funds.States like Kano, Bayelsa, Edo, Rivers and Delta sit on top of theIndex.

Index C

IndexC focuses on states’ ability to manage their debts sustainably. It examines theextent to which today’s gross revenue can service outstanding debts. Index Cwas assigned a weight of 15 percent. States with low debts like Anambra, Yobe,Sokoto and Katsina sit on top of Index C.

Conclusion

Stateswill need to focus on boosting IGR collection and simultaneously slowing downon borrowing. It is also important to rein in recurrent expenditure and re-workthe budgeting system. If this is done, states can increase their budgetperformance as well as pay backlogs of civil servants’ salaries, whilstgrappling with a ghost worker problem.

Questionson the credibility and usefulness of budgets are being asked, particularly atthe state level. Some states, like Cross River, have huge expenditure sizewhich is not commensurate with their revenue reality.

Stakeholders,including citizens, investors, civil society organisations and developmentpartners are now talking more about the usefulness of the key budgetinformation as a planning instrument.

Statesneed to look beyond rhetorics and commit to a reduction in their operatingcosts, including signiﬁcantly slashing unreasonable overheads while freeing upmore spending for social and economic infrastructure. States will need to linkfuture borrowing to sustainable projects, which can pay back the capital costof its current loans and improve the overall income proﬁle of the state.

Economicplanners will need to lift states from a perpetual cycle of borrowing, work toimprove tax collection efﬁciencies and realign budgeting with statewide plans.

Signiﬁcantinvestment is needed to improve the overall economic performance at the statelevel, which invariably could create jobs that feed into states’ IGR. Improvedspending is also critical for value-added tax revenue. Opportunities in aquaculture,agriculture, manufacturing, trade, logistics and tourism abound across states,but it seems many states lack the rigour and foresight to explore them.

Onlythen, will state budgets perform for the people; only then, will states becomeﬁscally sustainable.

DownloadPDF Here – State ofStates, The 2018 Edition