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State government finances: A curate’s egg

Given the swings in the Federation Account Allocation Committee (FAAC) pay-outs over the past few months, the need for states to bolster their internally generated revenue (IGR) cannot be overemphasised.
CBN

CBN

Given the swings in the Federation Account Allocation Committee (FAAC) pay-outs over the past few months, the need for states to bolster their internally generated revenue (IGR) cannot be overemphasised.

From the FGN’s expenditure framework for 2016 – 2018, the net distribution from the federation account and the VAT pool combined is projected at N5.72trn this year, therefore resulting in a pro-rata average of N477bn. For several months the drop in the country’s oil receipts due to the slide in oil prices and domestic oil production has been very visible in the FAAC pay-outs. The pay-outs from FAAC fell short within January to May this year, with April recording the lowest at N281bn. However, the pay-out increased to N510bn (US$1.63bn) in September (from August revenues). For October (from September revenues), the total monthly pay-out decreased by N90bn to N420bn (US$1.38bn), therefore falling back below the forecast pro rata monthly average.

The three previous distributions were boosted by the impact of the devaluation on 20 June. Both petroleum receipts based upon the US dollar price and customs revenues benefited from the adjustment. Additionally, efforts to bolster non-oil revenue have been recorded. It appears that an improvement in compliance has translated into an increase in dutiable imports. Furthermore, collections by the Federal Inland Revenue Service are laudable.

Although there was some level of cheer observed and this performance can be repeated, a quick recovery in oil prices is very unlikely. As such, all states have to steadily look inwards and strive to be self-dependent.

The most recent data on state government finances from the CBN reveal that in 2014, IGR provided 22% of the total revenues of the 36 states and the Federal Capital Territory, compared with 15% the previous year. Lagos achieved a rate of 67%, Ogun 40% and Rivers 32%. However, several states posted less than 5% including an oil producing state that has access to the 13% derivation formula, which is applied before the monthly division.

Lagos has achieved an IGR/total revenue ratio of over 50% for the past five years thus sits as the poster child. In the first quarter of this year, Lagos generated total revenue of N101.7bn. This is 5% higher than their target for Q1 and considerably higher than total generated revenue (N97.3bn) recorded in the corresponding period of 2015. IGR accounted for 75% of the total revenue.

By inference, tax revenue accounts for the largest share of Lagos state’s IGR due to its relative aggressive tax strategy which differentiates it from the other states. Tax collections by the Lagos Internal Revenue Service (LIRS) stood at N67.3bn. Lagos is expected to achieve good progress with its revenue collection drive in the subsequent quarters ahead as the implementation of multiple revenue collection channels and broadening of the state’s revenue base begin to unfold.

Despite the economic downturn, Ogun state is actively seeking ways to boost earnings. Ogun is tapping into its proximity to Lagos (Nigeria’s commercial hub) to lure investors; the state is managing to attract new investments. Local newswires indicate that last year, 88% of new investments in the manufacturing sector went to Ogun state. The state is using incentives such as rebates on land, tax cuts and tax holidays to attract investors. While the boost to internally generated funds (IGR) from this will not be significant in the near term, we expect immediate benefits to include reduced unemployment and a slight boost to consumer spend in the state.

Another state worth highlighting is Anambra. Through investment driven strategies, the state government is aggressively pursuing various avenues to bolster its internally generated revenue. The state government has actively sought methods to revive agricultural activities; long grain rice production has increased from 8,000 metric tonnes (mt) to 210,000mt annually. Additionally, as at January this year, local farmers were able to export vegetables (pumpkin leaves and bitter leaves) to the United Kingdom. The value of the exports was estimated at US$5m. There has also been increased focus on closing the social infrastructure gap. For instance, the state government succeeded in establishing the “Anambra State Primary Health Care Development Agency” geared towards providing adequate healthcare services; 63 health centres have been revamped and equipped (three from each local government area). If the development momentum is sustained, Anambra will be able to attract increased investments (both local and foreign) as well as stimulate economic activities within the state, thus bolstering its IGR.

Kaduna state has about 5% of the country’s population, but it contributes only about 2.3% to total GDP. The current governor is primarily focused on social justice and equity as well as job creation. The latter could provide tax revenue for the government. Based on figures from the National Bureau of Statistics (NBS) which draws its IGR data from the Joint Tax Board and State Boards of Internal Revenue (different from data reported by the CBN), Kaduna state’s internally generated revenue stood at N11.5bn last year.

Kaduna state’s governor has opted for a budget size of N215bn for the 2017 fiscal year with a capital and recurrent expenditure ratio of 60:40. If approved, the budget is expected to assist with the Anchor Borrowers Programme for six crops of comparative advantage, rebuilding and equipping of schools, completion of the Zaria water project and the creation of an agro-industrial park amongst others. Kaduna state is committed to business investments and simplifying processes to encourage start-ups. This was reiterated at the Kaduna Economic and Investment Summit (KADInvest) in April.

Following the drop in oil prices in mid-2014, state governments began to default on salary payments (civil service); this resulted in a squeeze on household expenses thus softening demand and leading to a general slowdown in the economy. The informal economy has suffered some setbacks. For example, the number of domestic staff in specific households have been curtailed due to cost management on the back of lower or no salary payments by state governments.

The DMO data put the domestic debt of the 36 states and the FCT at N2.50trn at end-2015. This amounted to 2.7% of the year’s GDP. Although Lagos is regarded as the yardstick for other states and has steadily generated over half of its revenue internally, it is the biggest debtor. As at December 2015 its domestic debt stock was N219bn, representing 9% of total domestic debt by states. Osun state, Akwa Ibom state, Bayelsa state and Delta state accounted for 5.8%, 5.9%, 4.1% and 12.8% of total debt respectively in the same period.

Osun state has struggled with its debt profile for at least the past three years; the state’s inability to build revenue has left it in an uncomfortable position to finance its debt. As for Bayelsa, the assumption is that the state government borrows to meet its expenses; however, there has been no visible impact on development within the state.

The FGN has launched three debt relief programmes for states in the past 15 months, seeking to reverse the emergence of sizeable salary and pension arrears. The third of its programmes was a N90bn loan for the states, announced in June 2016 and backed by an unspecified private-sector credit. The facility can only be accessed by states which have met the 22 conditions and applied for support.

However, the federal finance ministry announced that the loan would not be disbursed when the monthly distribution by the Federation Account Allocation Committee exceeded N500bn because the states would then be able to run their own programmes. It is worth noting that the pay-out has been above this threshold for two of the three past months.

To manage state government finances better, fiscal responsibility is imperative. Leakages need to be plugged and spending discipline employed. There should be a deliberate move towards proper data capturing to assist with monitoring finances. In addition to this, state governments should be willing to provide incentives for businesses without violating federal laws (e.g. state tax reforms).

Furthermore, a thorough consideration to privatise state resources or explore public-private partnerships to boost revenue generation as well as discover methods to share resources with neighbouring states to leverage on strengths and comparative advantage should result in better management of finances.
•Chinwe Egwim

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