Lagos, Rivers excluded as 34 states relied on FG for expenses – Report

A report coordinated to assess and rank the 36 States’ fiscal performance from most to least sustainable has revealed that 34 states excluding Rivers and Lagos states relied on federal transfers to cover their operating expenses.

The report, BudgIT’s flagship research product, assessed and ranked the 36 States’ fiscal performance from most to least sustainable and was themed ‘Moving Healthcare Delivery from Suboptimal to Optimal.

The report was presented on Tuesday in Abuja by BudgIT’s country Director, Gabriel Okeowo.

For the 2024 edition, BudgIT maintained the five metrics for ranking all 36 states, where Index A examined states’ ability to meet Operating Expenses (Recurrent Expenditure) with only their Internally Generated Revenue.

Index A1 looked at the percentage year-on-year growth of each state’s Internally Generated Revenue. Index B reviewed states’ ability to cover all operating expenses and loan repayment obligations with their Total Revenue (Internally Generated Revenue + Statutory Transfers + Aids and Grants) without borrowing.

Index C estimated the debt sustainability of the states using four major Indicators which are Foreign Debt as a % of Total Debt, Debt as a % of Revenue, Debt Service as a % of Revenue, and Personnel Cost as a % of Revenue.

Index D evaluated the degree to which each state prioritises capital expenditure over its operating expenses (recurrent expenditure).

In the edition, the fiscal performance ranking saw a reshuffling of the top positions, with Cross River joining the top five while Rivers State maintained the number one spot. Kebbi State achieved the most remarkable improvement, jumping 12 places from 28th to 26th, while Jigawa State experienced the steepest decline, dropping 16 spots to land at the 36th position.

According to the report, Rivers and Lagos were the only two states that generated more than enough Internally Generated Revenue (IGR) to cover their operating expenses, with IGR to operating expense ratios of 121.26 percent and 118.39 percent respectively.

Several other states, including Ogun, Anambra, Cross River, Kwara, Kaduna, and Edo, managed to generate IGR sufficient to cover at least 50 percent of their operating costs, with the rest relying on federal transfers.

In contrast, states such as Akwa Ibom, Imo, Taraba, Yobe, Bayelsa, and Jigawa required over five times their IGR to meet operating expenses, highlighting significant dependence on FAAC revenues and aid and grants.

Of note is that all 36 states managed to raise enough revenue comprising IGR, federal allocations, aid, and grants to fully cover their recurrent expenditures.

This indicated that no state needed to borrow to fund any portion of its recurrent spending.

According to the findings, In the 2023 fiscal year, the combined revenue of all 36 states in Nigeria increased significantly by 31.2 percent from N6.6 trillion in 2022 to N8.66trillion. This growth rate exceeded the previous year’s increase of 28.95 percent, indicating a notable improvement in fiscal performance.

Of the total revenue generated in 2023, Lagos State contributed N1.24trillion representing 14.32 percent of the cumulative revenue of the 36 States.

Gross FAAC, which grew by 33.19% from N4.05tn in 2022 to N5.4tn in 2023, contributed to 65% of the year-on-year growth of the combined revenue of the 36 states. This increase indicates the additional revenue accrued to states, albeit moderate, due to discontinuing the petroleum subsidy.

Also, 32 states relied on FAAC receipts for at least 55 percent of their total revenue, while 14 states relied on FAAC receipts for at least 70 percent of their total revenue.

Furthermore, transfers to states from the federation account comprised at least 62 percent of the recurrent revenue of 34 states, except Lagos and Ogun, while 21 states relied on federal transfers for at least 80 percent of their recurrent revenue.

According to the report, the picture buttressed the over-reliance of the state governments on federally distributable revenue and accentuates their vulnerability to crude oil-induced shocks and other external shocks.

The report indicated that the total expenditure across all 36 states reached N9.78tn, marking a 21.19% increase from the previous year’s N8.07tn. Lagos State led the spending, disbursing over N1.49tn, which accounted for 15.23% of the overall subnational expenditure.

The year saw different growth rates across spending categories, with personnel costs rising by an average of 12.9%, overhead costs by 26.75%, and capital expenditure seeing the most significant increase at 37.30%. Personnel cost rose to N1.99tn from N1.75tn in 2022, while overhead expenses climbed to N1.52tn from N1.24tn, and capital expenditure increased to N4.04tn, up from N3.47tn the previous year.

The aggregate operating expenses of the states, which formed 47.36% of the aggregate expenditure, increased by 21.17% from N3.8tn in 2022 to N4.64tn in 2023.

Additionally, N1.25tn, representing 12.8% of the cumulative spending of the states, was used to service debts. Interestingly, N287.56bn, not captured by states as part of their expenditure for the 2023 fiscal year, was utilised to offset contractor arrears, pension and gratuity arrears, and other outstanding liabilities.

The total debt stock of the 36 states surged by 38.1%, from N7.25tn in 2022 to N10.01tn. This growth was partly driven by a N606.12bn increase in domestic debt, resulting in an average year-on-year growth rate of 11.4%.

By December 31, 2023, the total domestic debt stood at N5.86tn. The situation was further complicated by rising foreign debt, which increased by 4.1%, from $4.43bn in 2022 to $4.61bn in 2023.

The liberalisation of the exchange rate exacerbated the financial strain on states, significantly raising their foreign loan repayment obligations in Naira terms.

Lagos State remained the most indebted in foreign currency, accounting for 26.9% of the total foreign debt, equivalent to $1.24bn.

Further analysis of the debt landscape revealed a considerable variance of N2.74tn in debt repayment obligations when comparing the exchange rate shift from N899.39 per dollar as of December 31, 2023, to the new rate of N1,492.9 as of June 2024.

The devaluation exposed many states to heightened financial risk, particularly the eight states where more than 50% of the total debt is dollar-denominated. Kaduna and Edo had the highest foreign debt-to-total debt ratios, at 86.06% and 60.54%, respectively.

The other states in this group, Ondo, Bauchi, Lagos, Enugu, Ebonyi, and Anambra had ratios ranging from 50% to 59%.

The debt burden also varied significantly across the country, with the average subnational debt per capita reaching N40,469 in 2023.

Twelve states exceeded this benchmark, with Lagos having the highest debt per capita at N138,034. In addition to the existing debt stock, the states have exiting liabilities totaling N1.19tn: N408.69bn is owed in contractor arrears, N521.36bn is owed in pension and gratuity arrears, N79.64bn is owed in salary and other staff claims, N4.36bn is owed in judgement debt and other pending litigation, and other payables and liabilities amount to N182.79bn.