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Economy | State and Local Govts

2021 State of States Report: Fiscal Options for Building Back Better

Oct 03, 2021   •   by   •   Source: Proshare   •   eye-icon 1432 views

Sunday, October 03, 2020  /06: 10 AM / by BudgIT/ Header Image Credit:  BudgIT

 

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FiscalOutlook

Economic shocks from theCOVID-19 pandemic took a toll on states' Internally Generated Revenue (IGR) andtheir share of federally collected revenue in 2020. Cumulatively, all 36 statessaw a 3.43% decline in their IGR from N1.26tn in 2019 to N1.21tn in the year2020 under review. In total, 18 states saw a decline in their year-on-year IGR2while 18 other states could weather the fiscal storm induced by the pandemic,growing their revenue - in some cases by as high as 87.02%. Worthy of note isLagos state, which despite being the epicentre of the pandemic, saw a 5.08%growth in its IGR, a testament to the resilience of its fiscal strategy.

 

Rivers state once againtopped the overall 2021 Fiscal Performance Ranking despite COVID-19 inducedfiscal shocks to its IGR, indicating that the fiscal fundamentals of thisstate, compared to others in the country, are more prudently managed. Twostates made it, as new entrants, to the Top 5 category in the overall 2021ranking - Ebonyi state emerged in 2nd position; up from 6th position in 2020 ranking,and Kebbi state emerged in 5th position, up from 11th position in 2020. Theentrance of Ebonyi and Kebbi states into the Top 5 category was driven largelyby growth in both state's IGR as recorded by the National Bureau of Statistics.Ebonyi state grew its IGR by 82.3% from N7.5bn in 2019 to N13.6bn in 2020,while Kebbi state grew its revenue by 87.02% from N7.4bn in 2020 to N13.8bn in2020. In the case of Ebonyi state, an additional performance driver was that italso significantly prioritized investment in state infrastructure, given itsavailable revenue; it spent more on capital expenditures (N76.1bn) compared to its spendingon operating expenses (N29.5bn). Ebonyi is also one of five states who spentmore on capital expenditures than operating expenses.

 

In the 2021 PerformanceRanking, two states dropped out of the Top 5 in overall ranking; Ogun state(now 19th) and Kano state (now 22nd), due to a sharp decline in their IGR in2020. This decline in IGR affected their performance in Index A, a component ofthe overall ranking model with the highest weight (45%). In the case of Ogunstate, the reduced priority placed on investment in infrastructure - whencompared to its operating expense - affected its performance on the 'Index D' component of the ranking model, further contributing to its decline.

 

StatesComparative Viability

Only three (3) states inthe country can meet their operating expenses obligations with a combination oftheir IGR and Value Added Tax (VAT) as measured in our 'Index A' ranking; thesestates are Lagos, Rivers, and Anambra and they appear at the top of the 'IndexA' ranking. In contrast, states at the bottom of the 'Index A' ranking need todo more to rapidly consolidate on any ongoing strategies to improve their IGRand by extension, their viability as federating entities. This is necessaryconsidering the comparative size of their operating expenses and the globalpush to transition away from fossil fuels like crude oil, a key source of federallydistributed revenue.

 

These states at the bottomof 'Index A' ranking include Jigawa, Delta, Benue, Taraba and Bayelsa.Nevertheless, all Nigerian states still need to work hard to build economicprosperity and create more jobs in their states to ensure that there is moremoney in circulation and economic activities that can be taxed to improve theirIGR.


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SubnationalDebt Outlook

Cumulatively, the 36states total debt burden increased by N472.63bn3 (or 8.78%) from N5.39tn in2019 to N5.86tn in 2020. This increase in total subnational debt was drivenlargely by exchange rate volatility which saw the value of the naira jump fromN305.9/$1 in 2019 to N380/$1 as at December 31st 2020. States with the highestforeign debt were significantly hit due to negative exposure to exchange rate volatility.These states include: Lagos, Kaduna, Edo, Cross River and Bauchi (See thedatasheet on 2020 Foreign Debt by state). Furthermore, five (5) statesaccounted for more than half (that is 63.63% or N300.7bn) of the net year-on-year subnational debt increase of N472.63bn for allthe states between 2019 and 2020: the states are Lagos, Kaduna, Anambra, Benueand Zamfara.

 

Eleven states in thecountry still have a comparatively low debt burden; their debt profiles are solow they can theoretically pay it off in a single year (using their 2020 totalrevenue). These states are: Jigawa, Sokoto, Kogi, Ebonyi, Katsina, Yobe,Bayelsa, Ondo, Kebbi, Kwara and Nasarawa and they appear at the top of the 'Index C' ranking. Eight (8) of these eleven states mentioned are in the north,while three (3) are in the south. We note that a low debt burden in itself isnot necessarily a good or a bad thing; however, these states are highlightedbecause they still have comparatively more leeway to borrow.


Thus, they need additionaltechnical support to be more strategic in their future borrowing to ensurevalue for money.

 

Additionally, states atthe bottom of the 'Index C' ranking have a high debt burden when compared withtheir 2020 total revenue. These states will need to urgently developPublic-Private Partnership (PPP) models for financing expenditures in criticalsectors, as their attractiveness to potential lenders is significantly reduced.The least attractive states in this regard are Cross River, Plateau, Imo,Adamawa and Bauchi, and they would need the most support from local andinternational development partners to build their capacity to leveragedifferent Public-Private Partnership models for effective and affordable publicservice delivery.

 

Spendingpriorities

Based on each state's 2020revenue, five states prioritized investment in infrastructure by spending moreon capital expenditure than operating expenses. The states are Ebonyi, Rivers,Anambra and Cross River states in the south and Kaduna state in the north.These states appear at the top of the 'Index D' ranking.

 

States appearing at thebottom of 'Index D' are those who prioritized operating expenses overinvestment in infrastructure for their citizens: a fiscal practice this projectdoes not encourage. Notable in this regard are Benue, Kogi, and Taraba, whoseoverhead cost component of their operating expenses was higher than theirrespective investments in capital expenditure in 2020. There is a need for theaffected states to immediately rein in their overhead expenditures andreprioritize investments in capital infrastructure for citizens.

 

Nineteen states, includingeight oil-producing states, saw a year-on-year decline in their capitalexpenditure, while seventeen states were still able to improve their investmentin capital expenditure, from 2019 levels despite fiscal constraints induced byCOVID-19. For a breakdown by state, see the datasheet/ infographic of "Year-on-Year capital expenditure growth by States".


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Buildingback better

Without a doubt, COVID-19ravaged the revenues of many Nigerian state governments and the need to exploreoptions for 'building back better'4 cannot be overstressed. A critical firststep for states would be to rapidly block financial leakages that could furtherdrain the little available revenue or future revenue. From the AnnualPerformance Assessment (APA) results of states under the State FiscalTransparency, Accountability And Sustainability (SFTAS) program, released in Q22021, only 7 states in Nigeria had functioning Treasury Single Accounts (TSA),an otherwise critical fiscal strategy that gives states more control over theirrevenues and could help states reduce leakages. The results were better forstates that had introduced reforms to block leakages, due to the existence of"ghost workers" and other forms of payroll fraud. About 24 states and 27 statesrespectively, had introduced "Biometric use in payroll management" and "Bankverification number use in payroll management".

 

Furthermore, only 16states published details of their contracts online for public scrutiny, while20 states were yet to do so at the time of the assessment. Procurementprocesses are one of the biggest areas through which revenue leakages can occur.Hence, the need for states to adopt open contracting principles to minimizeinstances of inflated contracts and other forms of procurement and proceduralfraud.

 

To ensure a sustainablerecovery and more resilience against future shocks, states need more revenuefrom a diverse revenue base spanning multiple sectors. Unfortunately, 39.1mpeople representing 56.1% of the combined 69.7m labor force across all statesin the country could not contribute adequately to the IGR pool of theirrespective states, through payment of income taxes (PAYE) as they were eitherunemployed or underemployed. This cost the states billions of naira in forgonerevenue and remains a critical setback all 36 states have to address, in theirenlightened self-interest, if they would like to be more resilient. States haveto revamp their economic prosperity blueprints and redesign them aroundincentivizing the private sector to exploit each state's export potentialacross different sectors to stimulate job creation.

 

Aside from the hugerevenue forgone from income taxes as a result of high unemployment andunderemployment in their states in 2020, the states also missed out on themultiplier effects of having a gainfully employed workforce from the revenues(Road Taxes, Value Added Taxes, etc.) that would have accrued from having morepeople in their states with higher purchasing power for consumption goods andservices. This needs to change.

 

Furthermore, to complementefforts in raising revenue and blocking revenue leakages, states also require arapid build-up of capacity in deploying custom and innovative Public-PrivatePartnership (PPP) models to deliver on critical infrastructure projects andprograms. This is especially in key sectors like Health, Education, Housing,and Agriculture given the shrinking fiscal space in which states are operatingand will continue to operate in the next few years.

 

Welcome to the 2021 Stateof States report and we hope you find one or two golden nuggets.

 

Download Here - 2021 Edition ofState of States Report


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