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The self-inflicted states’ fiscal crises 

By Olusegun Sotola
18 May 2015   |   3:29 am
REPORTS indicate there is fiscal crisis in 22 of the 36 states in Nigeria. Salaries and allowances are in arrears in these states and many welfare policies like free school lunch, social benefit payments and ongoing infrastructure projects have been suspended.
Nigeria- image source adesojiadegbulu

Nigeria- image source adesojiadegbulu

REPORTS indicate there is fiscal crisis in 22 of the 36 states in Nigeria.

Salaries and allowances are in arrears in these states and many welfare policies like free school lunch, social benefit payments and ongoing infrastructure projects have been suspended.

Before now, many of the affected states have used external funding sources like bonds and short-term loans as buffer but they have stretched that option. The servicing of those debts is partly responsible for the financial crisis across states.

The major concern is that the future outlook is gloomy as there are no indications that state fiscal situation will likely improve soon. Since mid-2014 when crude oil price crashed from $115 to about $50 per barrel in April, the share of federal sharable funds has depleted.

There are no strong indications that the crude oil price will rise in immediate future. A report by The Brookings Institute, a U.S. Think-tank, finds that crude price will most probably hover around the current price till 2016.

Also the Excess Crude Account, which has been the usual shock absorber, is almost exhausted. It currently has a balance of $2.45 billion – down from over $20 billion in January 2009. It will eventually get exhausted if crude price situation failed to improve soon.

Similarly, it is less likely that banks will be willing to give unbridled loan going by their previous cataclysmic experience to over-exposure.

In fact, there is an existing Central Bank of Nigeria (CBN) regulation that banks should not give public sector loan in excess of 10 per cent of their overall credit portfolios.

It is doubtful whether many of the states could substantially increase their internally generated revenue beyond the present level.

Apart from two or three states, economic activities are at subsistence level in the remaining states. Effort to boost internal revenue might not actually translate to increase in available fund.

State’s power to tax citizen is dependent on citizen’s ability to pay and their perception of how efficient the state is. Where this is lacking, there is a natural inclination to resist further payment.

It is easy for state officials to blame the global crude price fall or the federal government as some states have done. There are, however, facts that suggest the fiscal problem is self-inflicted.

Buoyed by the rise in global crude oil price between 2003 and 2013, states bit more than they can chew. Some state governments set up more agencies, bureaucracies and appointing many political appointees while imitating economically vibrant states.

Some initiated the so-called empowerment programmes. Many states remembered they ought to have a university, while others doubled theirs. Some built airport despite the fact that it is not commercially viable.

What is the benefit of an airport to a state that over 80% of indigenes is below the poverty mark and only state-owned or chartered aircraft use it occasionally. The level of income that informed the decision to embark on those projects has eroded and these states cannot curtail these expenses without collateral damage.

The crude oil crash is only an immediate cause; the problem touches fundamentally on the nature of the Nigerian federal state. The idea of state creation that started from 1967 has undermined the very essence of federalism as it has impacted on states’ ability to develop at its pace, design their economy in a way that is sustainable from locally generated revenue.

The states in Nigeria are not federating states as expected in a federal structure, rather a province created for administrative conveniences thereby creating a dependency problem

Given the fact that there is bound to be occasional bubble-bust cycle in crude price, states must design her growth independently of each other and according to income.

Salaries, emoluments and conditions of service of staff should be determined by capacity of states. There is no point in Kebbi and Rivers states paying the same salary scale.

Resource control for states has been championed as a solution, but this could be a medium term solution as states are differently endowed. The ultimate solution is for the Nigerian state to practise the spirit and principle of federalism.

The above points touch on the issue of viability of the states. The present cash crunch in some states exposes the folly of using political exigencies as the sole criterion for state creation.

A state as a coordinate unit in a federal system serves the purpose of independently driving development within its territory as such must have adequate economic power to fulfill this mission.

The reality is that states in Nigeria are not functioning as independent and coordinate units but more of an administrative unit in a unitary system.

It is typical for states to want to shift the blame on global crude instability and embrace another form of short-termism, like seeking over-draft in banks or running cap in hand around for bailout.

Such approach is not sustainable. The immediate solution to this fiscal crisis is for state governments to do what is reasonable in the face of cash crunch: Limited government. Scrap or merge agencies and ministries that seem duplicated. Reduce the number of political office holders.

There is no defendable need for senior special assistants, special advisers, senior special advisers and the likes. They render no obvious services. Quite a number of them are unwarranted and ultimately constitute a drain in the state’s purse.

State governments in this situation might be tempted to increase taxes and levies as a way of generating more internal revenues. This will be counter-productive. It will kill existing business and frustrate new ones.

Already, many states are harsh on business. According to the recent World Bank doing business report, some states impose levy and unnecessary permits which successfully kill new initiatives and frustrate existing businesses.

Rather, emphasis should be placed on blocking the leaks in revenue collection. A reasonable way to boost internally generated revenue is to stop the corrupt practices associated with it.

Every state governor is keen on sharing the Excess Crude revenue. The primary purpose of setting up the account is not to augment recurrent expenses but for capital projects such as power and infrastructure.

The Federal Government should not be tempted to use the excess crude account balance for patronage among the states.

Instead, state governors should be made to understand that running their states aground financially is tantamount to bankruptcy.

The new elected governments across the country should use their popularity to take hard decisions and address the fundamental cause of the cycle of fiscal issues. History taught us that crude oil price by nature is unstable but state development should not be unstable.

• Sotola lives in Lagos.