States spend more than earned, may continue reliance on FAAC income
• Borrowed 38.1% more, despite revenue growth
• 21.2% spike in expenditure pushes fiscal deficit to N1.12 trillion
• States’ operating expenses 100 per cent higher than generated revenues
Seven states recorded negative growth in their internally generated revenues (IGRs) last year just as 80 per cent of the earned income of 21 others came from the federation account in the face of rising cost of governance, indicating the severity of the fiscal crisis facing the sub-nationals.
The seven states include Jigawa, which slipped by 41.3 per cent, Ebonyi with 37.5 per cent negative growth in IGR, and Sokoto (which recorded -21.42 per cent). Others are Kaduna, which recorded -19.3 per cent, Osun (with -7.02 per cent) and Kano where IGR fell by 4.71 per cent. Abia also slipped back by -3.55 per cent.
In some states, the Federal Account Allocation Committee’s (FAAC) revenue accounts for over 90 per cent of the total income available for budget funding, indicating the level of vulnerability.
For one, IGR made up only 5.55 per cent of Jigawa’s total revenue last year, while it was 6.7 per cent in the case of Bayelsa state. A report by BudgIT puts last year’s combined revenue of all 36 states at 8.66 trillion, a modest growth of 31.2 per cent from N6.6 trillion recorded in 2022. But FAAC, which grew at over 33 per cent, drove the composite revenue growth by as much as 65 per cent.
The states would need to grow even faster to take up additional responsibilities this year through next year, including payment of salary adjustments.
Sadly, the key factors that drove growth last year – fuel subsidy discontinuation and sharp naira depreciation – will not influence revenue growth going forward.
“This increase is indicative of the additional revenue accrued to states, albeit moderate, due to the discontinuance of the petroleum subsidy,” BudgIT said. The report, while revealing what is known – that most states of the federation rely on FAAC allocation for survival. What is new, however, is that about 80 per cent of the 36 states of the federation are unable to generate enough revenue to keep them afloat.
Transfers to states from the federation account comprised at least 62 per cent of the recurrent revenue of 34 states, except Lagos and Ogun, while 21 states relied on federal transfers for at least 80 per cent of their recurrent revenue.
The reality brings to the fore, the tension of states’ over-reliance on the common purse for functionality while accentuating the vulnerability of the state governments to crude oil-induced shocks and other external shocks.
The domestic resource mobilisation capacity of the state governments seemed to improve in 2023 as IGR grew by 20.33 per cent to N2.19 trillion from the N1.82 trillion generated in 2022. Despite the modest growth, the states could only fund their personnel cost for the year, which grew by 14 per cent to N1.99 trillion.
The sub-national entities’ operating expenses in the fiscal year stood at N4.64 trillion, which was 112 per cent higher than realised IGRs. IGR growth was unequal across the board, with six states raising the bar by more than 50 per cent. While seven states pulled back, Zamfara grew its IGR by 240.22 per cent to top the leaders’ table.
With most states showing a level of insolvency, the BudgIT report noted that the fiscal viability and long-term sustainability of the states are largely dependent on their capacity to mobilise revenues – leveraging their natural resource endowments, technology, public-private partnerships, human capital and consequence management.
According to the report, what is perhaps more important is that states urgently need to digitise revenue collection, eliminate cash-based transactions, deploy tax intelligence to enumerate tax liabilities of entities -particularly high net-worth individuals – and enforce compliance, harmonise its different taxes, levies and fees, fully operationalise its treasury single account and improve the ease of doing business.
On a per capita basis, capital expenditure varied significantly across states as 24 states fell below the national average of N16,916, while only Lagos, Bayelsa, and Rivers managed to exceed the N30,000 mark.
The implementation of the N70,000 national minimum wage will strain the fiscal position of many states in the 2024 fiscal year as noted by the report. It said the full implementation and the consequential adjustments across the board will prove difficult.
The report also recommended a veritable way out of the looming crisis thus: “States would need to create fiscal space to implement the new minimum wage by sanitising and rationalising its workforce to maximise productivity, cutting down the cost of governance and non-essential expenditure, strengthening its supreme audit institution to ensure value for money, enhancing the participation of civil society and citizens groups in the budget process, reforming its procurement regime to ensure it aligns with the Open Contracting Data Standards.
The exponential growth in their revenues did not stop state governments from borrowing to fund their budget last year as pointed out by the report. The total debt stock of the 36 states surged by 38.1 per cent from N7.25 trillion in 2022 to N10.01 trillion.
The report highlighted that the growth was partly driven by a N606.12 billion increase in domestic debt, resulting in an average year-on-year growth rate of 11.4 per cent.
By 31st December 2023, the total domestic debt stood at N5.86 trillion. It stated that the situation was further complicated by rising foreign debt, which increased by 4.1 per cent from $4.43 billion in 2022 to $4.61 billion in 2023.
It also noted that 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 per cent of the total foreign debt, equivalent to $1.24 billion.
Further analysis of the debt landscape revealed a considerable variance of N2.74 trillion 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.
Meanwhile, some of the states said they are committed to developing their human and material resources to increase the revenue mobilisation capacity of their states in the coming years. For one, the administration of Gov. Siminalayi Fubara of Rivers State said its topmost priority in the last year despite the endless political crisis is human capital development, agriculture, health and education.
In the state’s 2024 budget, which is higher than the N744.7 billion for 2023, N283.23 billion was expected from federal allocation while N231 billion was expected from independent revenue. By the end of June 2024, the state grossed N209 billion from FAAC and N164.6 billion from IGR, suggesting the possibility of budget overperformance.
The State Commissioner for Budget and Economic Planning, Prof. Peter Medee, noted that the budget had over 50 per cent capital provision and gave key projects already executed as the Andoni section of the Unity Road, Egbema internal Roads, Aleto to Bori internal Roads, Omoku Dualised Road, Emohua Kalabari Road, school remodelling.
The budgIT analysis found that Rivers’ budget falls within the category of Index A of 0.82, meaning that the state has comparatively limited dependence on the federally-distributed revenue for its operations and has greater viability.
In the same vein, governments of the Southeast region improved in infrastructure – healthcare, education among others –in their 2023 budgets. The southeast governors improved their revenue generation through the expansion of tax payments, blockage of leakages, reduction in ghost workers, reduction in political appointees and minimisation of overseas trips among others.
From January to August 2024, Enugu state improved its revenue to N35.9 billion, which is well over the N33.9 billion it generated in 2023. Also, the Anambra state government improved its revenue from 75 per cent to 93 per cent of the approved total revenue of N155.9 billion for 2023.
But Ebonyi state’s IGR declined in 2023 by about 37.5 per cent. The state’s recurrent revenue of N14.83 billion was raised from IGR while N75.29 billion or 83.53 per cent came from FAAC.
One thing that has stood out for the five states in the region is the increasing rate of their domestic and foreign debts in the past six years.
Also, the budget performance of Oyo state for 2024 was placed at 64 per cent as of the third quarter projected to reach 75 per cent by the end of the year.
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