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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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