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States’ fiscal problem is self-inflicted
By Olusegun Sotola
Wednesday, 16 June 2010 00:00

PRESIDENT Goodluck Jonathan has recently indicated that there is a
significant shortfall in both oil and non-oil revenue. He noted that the dwindling revenue might continue for the rest of the fiscal year. Already reports are emanating that some states are financially broke. The affected states could hardly meet their recurrent expenses. Salaries and allowances are either in arrears or capital projects have slowed down. While many states are pushing for bonds, others have resorted to all sorts of loansfrom the financial institutions.

The Minister of State for Finance, Remi Babalola, has already painted a gloomy picture ahead. He warned that the expansionary spending plans are unsustainable and would drain windfall oil savings if not curtailed. Themajor concern is there are no indications that state fiscal situation will likely improve soon.

The international price of crude oil, the primary determinant of allocable fund, has shown no sign of increasing. It has been declining from $85 few weeks back to $71 per barrel. Also the Excess Crude Account, which has been the usual shock absorber, is almost exhausted. It currently has a balance of $3.2 billion down from over $20 billion in January 2009.

It is doubtful whether many of the states could substantially increase their internally generated revenue beyond the present level. Apart from two or three states, economic activities are at subsistence level in the remaining states. Effort to boost internal revenue might not actuallytranslate to increase in available fund. It is quite possible that such efforts will be resisted. This is understandable. State’s power to tax citizen is dependent on using such funds to impact positively on the life of its citizens. Where this is lacking, there is a natural inclination to resist further payment.

This is further compounded because many states are harsh on business. According to the recent World Bank doing business report, some states impose levy and unnecessary permits which successfully kill new initiatives and frustrate existing businesses. Given this situation, it is logical to conclude that states’ capacity to improve their internally generated revenue will be hindered.

It is less likely that banks will be willing to give unbridled loan going
by their recent cataclysmic experience. The Central Bank of Nigeria has set a limit for loans to public sector. The existing CBN regulation has directed banks not to give public sector loan in excess of 10 per cent of their overall credit portfolios. It is easy for state officials to blame the global economic crisis. There are however grounds to imply that state fiscal problem is self-inflicted. Profligacy and embarking on projects that have doubtful values, when measure in term of cost-benefit and sustainability, are responsible for this problem.

Buoyed by the rise in global crude oil price between 2003 and 2007, states bite more than they can chew. Some state governments set up more agencies, bureaucracies and appointing many political appointees while imitating economic vibrant states. Some initiated the so-called empowerment programmes. Many states remembered they ought to have a university, while others doubled theirs.

Given the experience in the 80s, they fail to understand that a boom is followed by a burst. The impacts of the added expenses without
commensurate revenue are maturing. Unfortunately the level of income that informed the decision to embark on those projects have eroded. These states cannot curtail these expenses without collateral damage.

The above points touch on the issue of viability of the states. The
present cash crunch in some states exposes the folly of using political exigencies as the sole criteria for state creation. State as a coordinate unit in a federal system serves the purpose of independently driving development within its territory as such must have adequate economic power to fulfill this mission. The reality is that states in Nigeria are not functioning as an independent and coordinate units but more of an administrative unit in a unitary system.

Going by the 2010 budget figure of many states, it could be seen that not a few states presented a reduced budget compared to that of 2009. For instance, Jigawa and Kwara have 7.6% and 3.5% reduction respectively in their budget estimates. This is coupled with a 5% deficit rate built into the budget which creates a shadow of doubt on the budgets. There has been a contention on what should be the exact crude oil benchmark to be used for the federal budget.

State budgets are a shadow of the federal budget. One should be less hopeful of how effective state budget will be. Federal hands-down that constitutes the chunk of state budgets has a grim outlook. Apart from the dwindling global oil price, domestic and external debt servicing cast a gloomy outlook for the monthly allocation. Not a few states will have to submit a large portion of their allocations from the Federation Account to debt servicing and joint ventures commitments.

The possible solutions to this fiscal crisis are for state governments to do what is reasonable in the face of cash crunch: Limit government expenditures. Scrap or merge agencies and ministries that seem duplicative. Reduce the number of political office holders. There is no defendable need for senior special assistants, special advisers, senior special advisers and the likes. They render no obvious services. Quite a number of them are unwarranted and ultimately constitute a drain in the state’s purse.

Raising fresh incomes outside the governmental system is not totally
impossible. Bond ought to have been ideal because it is non-inflationary.


It is usually sourced from the existing money supply but it has recently been politicised. Thus the potential for abuse is higher. However, states could still explore other options in the financial system weighing the debt obligation in the long term before accepting any offer. Loans of whatever form should be geared towards developmental project or investments that would bring in returns.

State governments in this situation might be tempted to increase taxes and levies as a way of generating more internal revenues. This will be counter-productive. It will kill existing business and frustrate new ones.


Rather, emphasis should be placed on blocking the leaks in revenue
collection. A reasonable way to boost internally generated revenue is to stop the corrupt practices associated with it.

Every state governor is keen on sharing the Excess Crude Revenue. The primary purpose of setting up the account is not to augment recurrent expenses but for capital projects such as power and infrastructure. The federal government should not be tempted to use the excess crude account balance for patronage among the states. Instead state governors should be made to understand that running their states aground financially is tantamount to bankruptcy.

Sotola is a Research Fellow with the Initiative for Public Policy
Analysis, a public policy think-tank, in Lagos.

Thompson Ayodele
Director
Initiative for Public Policy Analysis
P.O.Box 6434
Shomolu,Lagos
Nigeria
Email:thompson@ippanigeria.org
Backup: thompson.ayodele@gmail.com
Website: www.ippanigeria.org
*****Good Public Policy is Sound Politics**********
 

 

     

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