Time to make states fiscally responsible
Fiscal responsibility laws (FRLs) are becoming common frameworks for holding public officials accountable. The principles have become the basis for probity in governance and public administration.
Different countries have taken different routes in adopting the principles, yet the tenets of the laws are often similar, focusing on reducing fiscal imbalances, improving budget processes, increasing transparency and enhancing debt management.
For instance, Sri Lanka adopted the Fiscal Management Responsibility Act (FMRA) shortly after its 2001 crisis that resulted from a long history of fiscal imbalances. Its debt-to-gross domestic product (GDP), then, had exceeded 100 per cent. Hence, it sought ways to codify budget formulation and execution rules, strengthen transparency in the process and benchmark its spending within medium-term considerations.
Also, Spain’s Budgetary Stability Law (BSL) came into effect in 2003 with a specific focus on consolidating gains from the fiscal adjustment, which started in the mid-1990s and enhanced fiscal policy transparency. Its debt-to-GDP had climbed to almost 50 per cent, and it was obvious the country needed a broad fiscal reform to avert a major crisis, leading to the formulation of BSL.
Pakistan’s Fiscal Responsibility and Debt Delimitation Act (FRDD) also came after an extensive deliberation on rising fiscal deficits. It aimed at eliminating deficits and reducing public debt to prudent levels through effective public debt management without compromising poverty-reduction and social expenditures.
Even the much-older United Kingdom’s Code for Fiscal Stability was created to address weaknesses in the fiscal policy framework – a major cause of economic instability. The deterioration of the fiscal balance from the late 1980s to early 1990s underscored the essence of a prudent approach to financial projections as well as transparency in the design, implementation and monitoring of fiscal rules.
India, Panama, Brazil, Australia and many others were motivated by similar challenges to set up FRLs, with the countries either focusing on procedural or numerical rules to achieve the same objective – fiscal stability. Like its peers, Nigeria, in 2007, passed the Fiscal Responsibility Act on a broad vision of achieving a transparent and accountable government financial management framework. After decades of fiscal crisis manifesting in ballooning public debts among others, the country needed the Act “to ensure that revenue-raising policies, resources allocation decisions and debt-management decisions are undertaken in a prudent, transparent and timely fashion.”
Notwithstanding its shortcomings, the Act has become a bargaining chip for addressing financial indiscipline and poor public accountability as well as calling public officials to order. The institution of the Medium-term Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP) has become a notable tradition that resulted from the Act.
Over the years, the custodian of the law – the Fiscal Responsibility Commission (FRC) – has emerged as a notable voice in probity, accountability and fiscal discipline. Hopefully, it will be able to bite after the ongoing amendment process.
But beyond the inadequacy of the current law, reconciling the economic rationale of the Act with the political exigencies of fiscal federalism seems to be a major challenge in instituting fiscal discipline across board. It is impractical for the FRC or any other agency of the Federal Government to persuade state governments to rein in spending and centrally coordinate macroeconomic policies across countries in line with the philosophy of FRL. Hence, there has been a campaign to get state governments to domesticate the law.
In 2016, the Federal Government had an opportunity to negotiate the domestication of the law at the sub-national level when the states needed a bailout to pay salaries and meet other recurrent expenditure demands. Of course, that became one of the conditions of the bailouts extended to the states. As noted by the Chairman of the FRC, Victor Muruako, Nigeria has a single economy, which reaps daily from the financial recklessness of any of its sub-national units.
But about five years after the condition was given and the bailouts accessed, 13 states including Akwa Ibom, Benue, Borno, Edo, Imo, Katsina and Kano are yet to domesticate the law. Other defaulting states are Ogun, Ondo, Oyo, Plateau, Rivers and Zamfara. On the good side, 23 states have passed the law but the devil is in operationalising it and not merely codifying it. Thus, one would want to know the number of states that have set up agencies to oversee its implementation and where the commissions are allowed to function with a certain degree of independence.
“The pronounced weakness in the fiscal governance of subnational entities is a huge risk to the economic wellbeing of the federation. We are bothered that though Nigeria and its constituent states constitute a single national economy and that it is clear to all that the Federal Government is exerting itself to make things better at the level of fiscal governance, many states still operate as though they are only aware of macroeconomic challenges to the extent that it impinges on their monthly FAAC allocations.
“Given the size of the economy of all states and local governments in this country put together vis-à-vis that of the Federal Government, as well as their importance as the entities that relate directly with the ‘grassroots’, one sometimes gets the impression that subnational governments are keeping the tap running while the Federal Government mops the floor.
“By this, I mean that the benefits of the decisive efforts to ensure transparency, accountability and prudence at the Federal level are frittered away by a rather careless disposition towards fiscal responsibility at the level of states and local governments. We wish to use this medium to appeal to non-fiscally responsible states and local governments to please shut the proverbial tap and assist the Federal Government to clean the house – It is one house and it is the only one we have,” Muruako had stated at a public forum.
Indeed, a lot of states have simply left the tap running even though the Federal Government cannot be exonerated from the morass of fiscal indiscipline. Some of the states’ revenue mobilisation capacity has continued to dwindle amid mounting debts. In the first half of the year, states in the Northeast geopolitical zone generated average revenue of N7.2 billion.
If the Northeast is excused because of general insecurity in the axis, the performances of areas that are peaceful are not remarkably better. For instance, Southeast states could not sufficiently leverage their trade and entrepreneurship potential to boost public revenues. The whole zone realised N52.2 billion or an average of N10.4 billion per state in the period.
Lagos, Ogun, Rivers and the Federal capital Territory (FCT) – four entitles – alone control about 53 per cent of the N849.1 billion internally-generated revenue (IGR) the states pooled in the six months. This suggests that many of the states are still extremely weak financially, a situation Muruako said functional FRLs could improve.
The total states’ IGR amounts to 27 per cent of their recurrent expenditures for the year, which is estimated at N3.1 trillion. This means their IGRs can only take care of about 50 per cent of their recurrent spending. Already, the fiscal position of the states, which may worsen in the coming years, is fragile. As of December 31, 2020, their debt to total revenue ratio was 167 per cent while debt to IGR was 459 per cent. The ratio of FAAC allocation to total revenue was 64 per cent.
Sadly, the debt burden of states with relatively weak financial positions is worse. In the first half of the year, Gombe generated N5.4 billion, which makes one of the three states with the lowest IGR. At the close of last year, its debt to IGR far exceeded the national average with an estimate of 1,852 per cent. Adamawa, with a meagre N6 billion half-year internal revenue, sat on 1,686 per cent debt to IGR as of last year.
Private sector organisations play with revenue and cost to achieve profitability. They maximise revenue but minimise cost. But costs have continued to rise in Nigeria’s public space even in the face of nosediving revenues. Many have attributed the country’s financial crisis to this challenge, hence calling for reforms that would reduce the cost of governance.
According to Dr. Adetunji Ogunyemi, an economic historian at the Obafemi Awolowo University, who spoke at a recent sensitisation session, FRLs would increase openness, financial integrity and accountability across different levels of government.
He said the law has the capacity to address the flaws in revenue generation, budgeting and expenditure monitoring.
Last week, the International Monetary Fund (IMF) restated its call for a broad reform to avert fiscal risks. There are, of course, several reform initiatives that could improve governance at the state level but, perhaps, operationalising independent FRL institutions is one of the proverbial low-hanging fruits the country can explore as it seeks solutions to the current financial challenges.